key terms

Market failure

when the free market fails to achieve allocative efficiency

Free market

a market where resources are allocated by market forces with no government intervention

Allocative efficiency

no excesses or shortages

Externalities

impact on a third party that goes unpaid for by the market

Negative externalities in production

negative impact on a third party that goes unpaid for by the market as a result of production of a good

Negative externalities in consumption

negative impact on a third party that goes unpaid for by the market as a result of consumption of a good

Positive externalities in production

positive impact on a third party that goes unpaid for by the market as a result of production of a good

positive externalities in consumption

positive impact on a third party that goes unpaid for by the market as a result of consumption of a good

Marginal

next unit of output

Marginal Social Cost

the total cost to society incurred by the next unit of output being produced or consumed

Marginal external cost

the total cost to a third party incurred by the next unit of output being produced or consumed

Marginal private cost

the total cost incurred to the buyer or seller by the next unit of output being produced or consumed

Imperfect information

a situation where one side of the market has more information than the other side of the market