Market Failure

Market Failure

Failure of the market to allocate resources efficiently.

Allocative Inefficiency

Too many or too few goods are produced and consumed from the point of view of what is socially most desirable.

Externality

An effect on a third party from the production or consumption of a good or service.

Marginal Private Costs (MPC)

Costs to producers of producing one more unit of a good.

Marginal Social Costs (MSC)

Costs to society of producing one more unit of a good.

Marginal Private Benefits (MPB)

Benefits to consumers from consuming one more unit of a good.

Marginal Social Benefits (MSB)

Benefits to society from consuming one more unit of a good.

Merit Goods

Goods that are beneficial to consumers and third parties but are underprovided by the market.

Demerit Goods

Goods that are harmful to consumers and third parties but are overprovided by the market.

Deadweight Loss

Cost to society created by market inefficiency when supply and demand are out of equilibrium.

Tragedy of the Commons

The tendency of a resource to be overused and under-maintained when it is unowned and non-excludable.

Common Pool Resources

Resources that are not owned by anyone, do not have a price, and are available for anyone to use.

Positive Externality

External benefits that result from the production or consumption of a good.

Negative Externality

External costs that result from the production or consumption of a good.

Indirect Taxes

Taxes that aim to increase the price of goods to reduce consumption.

Nudge Theory

A concept in behavioral economics that suggests positive reinforcement and indirect suggestions can influence the motives and incentives of individuals.

Public Goods

Goods that are non-excludable and non-rivalrous, typically not produced by the market.

Information Asymmetries

Situations where one party in economic transactions has more information than the other, resulting in market failure.