Welfare Economics: Evaluating Market Efficiency and Market Failure

Vocabulary flashcards focusing on key concepts from welfare economics, market efficiency, and market failure.

Positive Analysis

Describes what is happening and predicts future effects without value judgments.

Normative Analysis

Prescribes what should happen based on value judgments and opinions.

Economic Surplus

The total benefits minus total costs from a decision, representing improved well-being.

Market Efficiency

An outcome where economic surplus is maximized, yielding the largest possible economic benefits.

Deadweight Loss (DWL)

Economic surplus that falls below the efficient outcome, measuring the extent of market failure.

Consumer Surplus

The economic surplus gained from buying something at a price lower than what one is willing to pay.

Producer Surplus

The economic surplus obtained from selling something at a price higher than the marginal cost.

Voluntary Exchange

A trade where both buyers and sellers agree because they gain from the transaction.

Equity

A measure of fairness in the distribution of economic benefits.

Market Failure

When market forces lead to an inefficient outcome due to issues like market power and externalities.

Externalities

Side effects of transactions that affect third parties, often leading to inefficiency.

Rational Rule for Buyers

Buy until the marginal benefit equals the price paid.

Rational Rule for Sellers

Sell until the marginal cost equals the price received.

Information Problem

A situation where one party has more or better information than the other, leading to market inefficiencies.

Government Failure

When government interventions lead to worse outcomes than the market would produce.

Economic Pie

A metaphor for the total economic output and surplus generated from trade and transactions.

Marginal Benefit

The additional benefit received from consuming one more unit of a good or service.

Marginal Cost

The additional cost incurred from producing one more unit of a good or service.

Distributional Consequences

The effects of policies on the allocation of economic benefits among different groups.

Efficient Quantity

The quantity of production that maximizes economic surplus, where marginal benefit equals marginal cost.