Economic Externalities and Market Equilibrium

These flashcards cover important terms related to externalities, market equilibrium, and government interventions in economics.

Externality

A situation where a person's activity has an adverse or beneficial effect on a party not involved in the activity.

Negative Externality

Occurs when an activity imposes an adverse effect on a bystander who is not compensated by the person causing the effect.

Positive Externality

Occurs when an activity has a beneficial effect on a bystander who does not pay for that benefit.

Corrective Tax

A tax designed to induce private decision makers to take account of the social costs that arise from a negative externality.

Market Failure

A situation in which the allocation of goods and services is not efficient.

Equilibrium Price

The price at which the quantity of a good demanded by consumers equates to the quantity supplied by producers.

Deadweight Loss

The loss of economic efficiency that occurs when the equilibrium for a good or service is not achieved or is not achievable.

Economies of Scale

A situation in which the average cost of production decreases as output increases.

Diseconomies of Scale

A situation in which the average cost of production increases as output increases.

Subsidy

A government payment that supports a business or market.

Price Ceiling

A maximum price set by the government that can be charged for a product.

Price Floor

A minimum price set by the government that must be paid for a good or service.