1.3 market failure - keywords

complete market failure

when a market fails to supply any of a good which is demanded, creating a missing market

market failure

where resources are inefficiently allocated due to imperfections in the working of the market mechanism

missing market

a market where the market mechanism fails to supply any of a good

partial market failure

when a market for a good exists but there is overproduction or underproduction of the good

externality

the cost or benefit a third party receives from an economic transaction outside of the market mechanism; it is the spillover effect of the production or consumption of a good or service

private costs

the costs to the individual participating in the economic activity; the supply curve represents private costs

external costs

the costs to a third party not involved in the economic activity; they are the difference between private costs and social costs

social costs

the costs of the activity to society as a whole; calculated by private costs plus external costs

private benefits

the benefits to the individual participating in the economic activity; the demand curve represents private benefits; private benefits could also be a firm’s revenue from selling a good

external benefits

the benefits to a third party not involved in the economic activity; they are the difference between private benefits and social benefits

social benefits

the benefits of the activity to society as a whole; they are private benefits plus external benefits

private good

a good which possesses the characteristics of rivalry (once consumed, it cannot be consumed by any one else) and excludability (it is possible to prevent someone else from consuming the good)

public good or pure public good

a good which possesses the characteristics of non-rivalry (or non-diminishability) and non-excludability (which includes the characteristic of non-rejectability)

quasi-public good or non-pure public good

a good which does not perfectly possess the characteristics of non-rivalry and non-excludability and yet which also is not perfectly rival or excludable

non-rivalry, non-diminishability, or non-exhaustability

consumption by one economic agent does not reduce the amount available for consumption by others

non-excludability

once provided, it is impossible to prevent any economic agent from consuming the good

non-rejectability

once provided, it is impossible for any economic agent not to consume the good

free rider

a person or organisation which receives benefits that others have paid for without making any contributions

symmetric information

where buyers and sellers have potential access to the same information; this is perfect information

imperfect information or imperfect market information

where buyers or sellers or both lack information to make an informed decision

information failure or information gap

where buyers or sellers or both don’t have the information that is available to make a decision

asymmetric information

where buyers and sellers have different amounts of information, with one group having more information than the other

principal-agent problem

occurs when the goals of principals, those standing to gain or lose from a decision, are different from agents, those making decision on half of the principal - examples include shareholders (principals) and managers (agents), or children (principals) and parents (agents)