Market Failure/Gvt Intervention

Socially optimum output

This occurs where there is allocative efficiency, or where the marginal social cost of producing a good is equal to the marginal social benefit of the good to society. Alternatively, it occurs where the marginal cost of producing a good (including any external costs) is equal to the price that is charged for consumers (P=MC for the last unit produced)

Allocative efficiency

Is achieved when social or community surplus is maximised. This occurs at the socially optimum level of output, that, where MSB equals MSC. This is because of the level of output, it is not possible to reallocate resources to make one party better off without making others worse off

Social (community) surplus

The sum of consumer and producer surplus at a given market price. It is the net benefit available to society from an economic transaction or activity. (Sum of producer and consumer surplus)

Positive externality of production

The benefits enjoyed by the third party that are not directly involved in the production or consumption of the good or service. Where MSC<MPC

Positive externality of consumption

The benefits enjoyed by the third party that are not directly involved in the production or consumption of the good or service. Where MSB>MPB

Welfare loss

A loss of a part of social surplus (consumer plus producer surplus) that occurs when there is market failure so that marginal social benefits are not equal to marginal private benefits

Negative externality of production

Expenses incurred by third parties in an economic transaction for which no compensation is paid. MSC>MPC

Negative externality of consumption

Expenses incurred by third parties in an economic transaction for which no compensation is paid MSB<MPB

Merit good

Products that create positive externalities when they are produced or consumed. Hence the MSB of production and the consumption of merit goods exceeds the MPB. Such as education or healthcare

Demerit good

Products that create negative eternalities of production/consumption to third parties. They are overproduced and overconsumed in a free market. (MPC>MSC) are excludable (?)

Common pool resources

A diverse group of natural resources that are non-excludable, but their use is rivalrous, for example fisheries

Tragedy of the commons

A situation with common pool resources, where individual users acting independently, according to their own self-interest, go against the common good of all users by depleting or spoiling that resource through their collective action

Excludable

A charactersitic that most goods hace is the ability of producers to charge a price and thus exclude whoever is not willing or able to pay for it from enjoying it.

Rivalrous

Goods and services are considered to be rivalrous when the consumption by one person, or group of people, reduces the amount available for others

Indirect tax

A form of government intervention where an expenditure tax that increases the costs of production is imposed on firms. This can be transferred to consumers via higher prices

Pigouvian tax (example of indirect tax)

A form of indirect tax in response to negative externalities and common pool resources by taxing the producer/consumer in order to make them pay for the negative externalities of production/consumption

Carbon (emissions) tax

Payment to the government levied on the carbon content of fuel. They are a type of Pigouvian tax

Awareness creation/education

Solution to a type of market failure, to encourage a behavioural change to increase/decrease the demand for a particular good/service

Tradable permits

Permits to pollute, issued by a governing body, that starts a maximum amount of pollution allowable. These permits may be traded (bought or sold) in a market for such such markets.

Collective self-governance

In the case of a common pool resource, such as a fisheries users solve the problem of overuse by devising rules concerning the obligation of the users, the monitoring of the use of the resource, penalties of abuse and conflict resolution

Producer subsidy

Grant per unit of production to firms, by the government to encourage production and lower the price of the good or service

Direct/government provision

Form of government intervention when the government directly provides/supplies certain goods/services deemed to be in the best interest of the public (public goods/merit goods)

Public good

Collective consumption goods that have two key characteristics of being non-rivalrous or non-excludable. For example, armies, flood control, lighthouses, street lighting

Free rider

Occurs when people have access to use or benefit from a good or service without having to pay for it as a result the good or service will be under-provided or not provided at all in a free market

Contracting out to the private sector

An approach to government intervention in response to public goods by paying a specialised third-party firm with the expertise to provide a public good