chapter 13- market failure

what is market failure

when the free market fails to allocate resources efficiently

what is a private benefit

a benefit received directly to the consumer or producer involved in economic activity

what is an external benefit

a benefit received by a third party, not involved in the transaction

what is social benefit

the total benefit to society

what is a private cost

a cost paid by the producer or consumer directly involved in economic activity

what is an external cost

a cost imposed on a third party not directly involved in the transaction

what is a social cost

total cost to society

what is a public good

a good that is non-excludable and non-rivalrous

what is the free-rider problem

people can benefit from a good without paying for it, reducing firms incentive to provide it

causes of market failure

public goods, merit goods, demerit goods, external costs, abuse of monopoly power

what happens when external costs exist

goods with external costs may be over-produced and over-consumed

what happens when external benefits exist

goods with external benefits may be under-consumed and under-produced

what is the main consequence of market failure

resources are misallocated, society’s resources are not being used in the most beneficial way