Market Failures and Government Interventions in Economics

These flashcards cover terms and concepts related to market failures and the role of government interventions in economics.

Government Intervention

When the central authority prevents a market from reaching its equilibrium.

Price-takers

The notion that in competitive markets firms have no market power over the prices they sell their goods for.

Unit Surplus

When quantity supply is greater than quantity demand at a given price.

Inventory

The result of unit surpluses in which a firm has to store their unsold goods at a cost.

Unit Shortage

When quantity demand is greater than quantity supply at a given price.

Economic Inefficiency

The difference in a market's potential and actual outcome. Anything not at equilibrium is inefficient.

Dead Weight Loss

The economic inefficiency that arises when a market is not in equilibrium.

Market Clearing

At a certain market price, the quantity supplied and demanded match.

Market Intervention

Done if there is assumed to be a disequilibrium, typically done by a governing authority.

Price Controls

Government intervention in which the central authority sets a price that is not the market equilibrium price.

Normative Decision

When a government body is making a judgement about the conditions set by a market.

1st Fundamental Welfare Theorem

Pareto efficient outcomes can come from a competitive market equilibrium.

Price Floors

A legal minimum price that firms may sell their goods for.

Binding Price Floor

A minimum selling point that is above the equilibrium.

Price Ceilings

A legal maximum price that firms may sell their goods for.

Binding Price Ceiling

A maximum selling point that is below the equilibrium.

Taxation

When a central authority creates various fees related to income, wealth, and or consumption.

Wealth and Income Taxes

Taxation based on the ability to consume.

Sales and Excise Taxes

Taxation based on actual consumption.

Progressive Tax System

Tax system where the wealthier individuals pay a higher proportion of all taxes.

Regressive Tax System

A tax system where the poorer individuals pay a higher proportion of all taxes.

Vertical Equity

The idea that those who are wealthier should pay a higher proportion of a tax.

Horizontal Equity

The idea that those who have similar incomes should be taxed similarly.

Public Provision

The process of a central authority either paying for or producing goods and services for public use.

Public Goods

Goods or services provided by a central authority for public use.

Negative Externalities

Costs that spill outside of the markets that create them.

Commodity Taxes

Per unit tax on goods or services.

The Tax Wedge Model

A simple framework for analyzing the effects of a tax in a market using supply and demand.

Tax Burdens

Portion of tax revenue and dead weight loss that is paid by producers and consumers.

Pigovian Taxation (Sin Taxes)

Taxing goods that have negative externalities.

Social Contract

Our self-regulation due to the fact markets are powerful but too sharp for civil society.

Positive Externalities

Benefits that spill outside of the markets that create them.

Social Welfare

A type of subsidization that provides assistance for low-income families.

Research and Development

A type of subsidization when the government spends money for especially valuable technologies.

Commodity Subsidies

Per unit subsidy on goods or services.

Subsidy Wedge Model

A simple framework for analyzing the effects of a subsidy on a market using supply and demand.

Subsidy Expenditure

The total cost to the central authority of instituting a subsidy.

2nd Fundamental Welfare Theorem

If a society is at a Pareto Optimal position, it can move to any other Pareto Optimal position through redistribution.

Social Welfare Function

A metric society uses to measure the success of markets and policies.

Social Inefficiency

Happens when a decision of one party damages the other party with no compensation.

Capitalism

An economic system in which capital and labor flows about the economy are determined by market forces.

Compensation

To pay someone for work or experienced damage.

Redistribution

To redirect income from one source to another.

Uncompensated Damage (Cost)

Damages to individuals that do not receive payment for those damages.

First Law of Thermodynamics

Energy can neither be created nor destroyed, but can only change forms or transfer.

Natural Resources

Aspects of the natural world which are especially important to economic systems.

Social Damage (MD/MED)

Damage to society created by economic behavior.

Marginal External Damage (MED)

The incremental increase in damage for each unit increase in damaging behavior.

Private Value

The value to consumers and producers in a given market, not affected by externalities.

Social Value

The value to consumers, producers, and those outside of the market.

True Social Cost

The total cost to society of some economic behavior after considering private and social costs.

Socially Efficient Equilibrium

The point social supply/demand intersects the private demand/supply.

Internalize the Externality

The ability of consumers or producers to behave as if they are correcting externality they have created.

Anthropocentrism

The tendency of policy to be human focused at the expense of the natural world.

Command and Control

Policies to reduce negative externalities that rely on standards, rules, limits and/or bans created by a central authority.

Market-based Mechanisms

Policies to reduce negative externalities that rely on market dynamics to reduce damage.

Fund Pollutants

Pollutants for which nature has some absorptive capacity.

Stock Pollutants

Pollutants for which nature has no absorptive capacity.

Pigovian Taxation

Taxes a good to the cost of external damages that good produces.

Cap and Trade

AMBM program that creates an emissions cap and then disperses permits to firms allowing them to pollute.

Double Dividend

The idea that environmental policy not only improves the environment but also can generate revenue.

Tradable Pollution Permits

Used in cap and trade programs, these permits give firms the right to emit pollutants.

Emissions Standard

A command and control policy that sets allowable emissions for a pollutant.

Efficient Property Rights

Property rights that are complete, transferable, and enforceable.

Coase Theorem

A theory which posits that negative externalities can be solved through mutual transactions.

Class-action Lawsuits

The ability of many individuals to enter into a joint legal suit against a single firm.

Marginal External Benefit

The incremental change in social benefit that arises from a positive externality.

Use-value

The economic value of a natural resource.

Non-use Value

The non-economic and social value of a natural resource.

Option Value

Part of non-use value, the value one places on the future ability to enjoy something.

Existence Value

Part of non-use value, the value one places on something they will never consume but still gain utility from its existence.

True Social Value

Use value + non-use value.

Hedonic Pricing Model

Uses data on housing to try and measure willingness to pay for air quality.

Rivalness

The extent to which consumption of a good prevents others from consuming the good too.

Excludability

Extent to which consumption of a good has barriers.

Commons Goods

Goods that are non-excludable but rival.

Club Goods

Goods that are non-rival but excludable.

Pure Public Goods

Goods that are both non-rival and non-excludable.

Private Goods

Goods that are both rival and excludable.

Free-rider Problem

When someone consumes a public good without helping to pay for it.

Tragedy of the Commons

The over exploitation of a Commons Good.

Resource Collapse

Use of a resource in an unsustainable fashion.

Catch-share Program

A market-based policy that seeks to reduce fishery collapse.

Pigovian Subsidy

The proffered policy for goods with positive externalities.

Collective Action

The idea that when confronted with a social problem, society will respond by facing the problem as a group.

Congestion Fees

A market-based policy to reduce cars on busy roads by placing a fee on private cars brought into a busy area.