Economics Chapter Review: Market Failure, Public Goods, and Government Role

Vocabulary flashcards covering key concepts of market failures, externalities, public vs. private goods, government spending, and political collective decision making.

Market Failure

A situation in which the market economy leads to either too many resources going to a specific activity (over-allocation) or too few going to a specific activity (under-allocation), preventing economic efficiency.

Externality

A consequence of an economic activity that affects individuals or third parties who had nothing to do with the activity or transaction.

Third Parties

Parties who are not directly involved in a given economic activity or transaction.

Negative Externality

A harmful spillover effect of production or activity (such as pollution from a steel mill) that occurs when market resources are over-allocated to an activity.

Positive Externality

A beneficial spillover effect of an activity (such as inoculations) where the private market under-allocates resources because companies cannot generate sufficient private profit.

Monopoly

A firm that can determine the market price of a good, representing the extreme case where it is the sole seller of a good or service.

Principle of Rival Consumption

The rule stating that a good can be consumed by only one individual at a time; applies strictly to private goods and does not apply to public goods.

Public Good

A good to which the principle of rival consumption does not apply, which can be consumed jointly by many individuals at the same time, and where excluding nonpaying customers is too costly to be feasible.

Private Good

A good that can be consumed by only one individual at a time, adhering strictly to the principle of rival consumption.

Free Rider

An individual who does not pay for a good or service (such as avoiding taxes) but still receives and consumes all the benefits that everyone else gets.

Full Employment Act of 1946

Legislation passed in 1946 stating that the federal government is responsible for promoting full employment, price stability, and economic growth.

Government Sponsored Goods

Goods deemed socially desirable by the government, such as museums and public parks.

Government Inhibited Goods

Goods deemed socially undesirable by the government, which are regulated, restricted, or prohibited (such as certain illegal drugs).

Transfer Payment

A monetary payment made by the government to individuals for which no service or goods are rendered in return, such as Social Security benefits.

Transfer in Kind

Government assistance provided in the form of goods or services directly rather than monetary payments, such as EBT food stamps or Section 8 housing.

Medicare

The second-biggest domestic government program that subsidizes healthcare services for individuals over age 65.

Medicaid

A government-funded program that provides healthcare coverage specifically for low-income individuals.

Theory of Public Choice

The study of collective decision-making—examining how voters, politicians, and interested parties act and how their actions influence nonmarket decisions.

Incentive Structure

The formal system of rewards and punishments that individuals face with respect to their actions.

Majority Rule

A collective decision-making system in which group decisions are made on the basis of receiving more than 50% of the vote.