Market Failure and Externalities

Flashcards created to review key concepts related to market failure and externalities.

What is an externality?

An externality is a cost or benefit caused by one party but incurred or received by another.

What is market power?

Market power refers to the ability of a firm to influence the price of the good or service it produces.

What are the four types of market structures mentioned in the notes?

Perfect competition, monopolistic competition, oligopoly, monopoly.

What is asymmetric information?

Asymmetric information is when one party in a transaction has relevant information that is not known by or available to the other party.

What is a moral hazard?

A moral hazard is a situation where an economic actor has an incentive to increase its exposure to risk because it does not bear the full costs associated with that risk.

What are negative externalities?

Negative externalities occur when the consumption or production of a good causes harmful effects to a third party.

How is Marginal Social Cost (MSC) defined?

The Marginal Social Cost is what is best for society.

Calculate the total cost of accounting for an externality given the prices and quantities in the market.

The total cost is calculated as (actual price - socially optimal price)(socially optimal quantity - market quantity).

What is the Coase Theorem?

The Coase Theorem states that an efficient outcome can be achieved by the private sector without government involvement when property rights are well-defined and transaction costs are low.

What is a Pigouvian Tax?

A Pigouvian Tax is imposed on a good or service whose production creates an external cost, and it does not create deadweight loss.

What are positive externalities?

Positive externalities arise when one party makes another party better off without compensation.

Give an example of a sector solution for positive externalities.

Foundations and charities provide philanthropy and support various causes such as the Arts and environment.

What are subsidies in the context of public sector solutions?

Subsidies are payments made by the government to sellers to encourage production for the benefit of society.