Understanding Externalities and Market Failure

These flashcards cover key economic concepts regarding externalities, market efficiency, and government interventions.

Externality

A consequence of an economic activity that affects other parties without this being reflected in market prices.

Positive Externality

A change in benefits that leads to a beneficial effect on third parties.

Negative Externality

A change in costs that negatively affects third parties.

Deadweight Loss

The loss of economic efficiency when the equilibrium outcome is not achievable or not achieved.

Subsidy

A government payment that supports a business or market, often used to encourage production in the presence of positive externalities.

Taxation

The process of imposing a financial charge by the government, often used to deter overproduction related to negative externalities.

Coase Theorem

A theory that proposes private individuals can negotiate without cost to solve the problem of externalities.

Market Failure

A situation in which the allocation of goods and services is not efficient, often due to externalities.

Social Cost

The total cost to society of producing a good or service, including both private costs and external costs.

Social Benefit

The total benefit to society from the consumption of a good or service, including both private benefits and external benefits.