Market Failure and the Role of Government

These flashcards cover key concepts related to market failure and the role of government, focusing on public goods, common resources, externalities, and regulatory measures.

Public Goods

Goods that are neither excludable nor rival, such as national defense and basic research.

Common Resources

Goods that are rival but non-excludable, like fish in the ocean and clean air.

Tragedy of the Commons

A situation where common resources are overused to the detriment of society, typically due to individual self-interest.

The Free Rider Problem

When individuals benefit from a good without contributing to its cost, leading to underproduction of public goods.

Natural Monopoly

A market situation where a single firm can supply the entire market more efficiently than multiple firms can.

Marginal Private Cost

The cost borne by a producer for producing an additional unit of a good.

Marginal External Cost

The cost of producing an additional unit that falls on people other than the producer.

Marginal Social Cost

The total cost to society of producing an additional unit, incorporating both marginal private cost and marginal external cost.

Pigovian Tax

A tax imposed to correct the negative externalities, set equal to the marginal external cost.

Cap-and-Trade

An environmental policy that sets a limit on emissions and allows firms to buy and sell permits to pollute.

Negative Externalities

Costs suffered by third parties as a result of economic transactions, often leading to overproduction in markets.

Positive Externalities

Benefits enjoyed by third parties from an economic transaction, leading to underproduction in markets.

Vouchers

Documents that grant a holder the right to receive a specific benefit or service, often used to encourage activities with positive externalities.