Econ flashcards externality mechanisms/ public goods

Negative production externality — relationship between MSC and MPC?

MSC > MPC.

Why does a negative externality cause overproduction?

External cost ignored → firms consider MPC rather than MSC → private equilibrium output > socially efficient output → overproduction → welfare loss.

Negative externality full chain?

External cost exists → MSC > MPC → market produces where private costs/benefits determine equilibrium → Qmarket > Q* → good underpriced relative to social cost → overproduction → deadweight welfare loss → partial market failure.

Positive consumption externality — relationship?

MSB > MPB.

Why do positive consumption externalities cause underconsumption?

Consumers consider private benefits but ignore external benefits → perceived benefit < social benefit → market consumption < socially optimal Q → welfare loss.

Define public good.

A good that is non-excludable and non-rivalrous.

Non-excludable means?

People cannot easily be prevented from consuming it once provided.

Non-rivalrous means?

One person's consumption does not reduce availability to others.

Examples of public goods?

National defence and street lighting.

Define free-rider problem.

Because people can consume without paying, they have an incentive not to pay voluntarily.

Public goods → complete market failure chain?

Non-excludability → consumers can free-ride → firms cannot guarantee payment → insufficient profit incentive → private provision is zero/too low → complete market failure → potential state provision funded through taxation.

Define quasi-public good.

Good possessing some but not all characteristics of a pure public good.

Define asymmetric information/information gap.

One party has more/better information than another.

Define adverse selection.

Information asymmetry causes the less-informed party to disproportionately attract the worse/high-risk type.

Second-hand car adverse-selection chain?

Sellers know quality better than buyers → buyers cannot distinguish good cars/"lemons" → offer average price → owners of good cars leave market → average quality deteriorates → market shrinks/can collapse → beneficial trades lost → market failure.

Define moral hazard.

Someone takes more risk because another party bears the cost.

Insurance → moral hazard?

Insurance reduces personal cost of loss → incentive to take precautions ↓ → risky behaviour may ↑.

Define merit good.

Good under-consumed relative to social optimum because consumers underestimate its private benefits; often generates positive externalities.

Examples of merit goods?

Education and healthcare.

Define demerit good.

Good over-consumed relative to social optimum because consumers underestimate its private costs; often generates negative externalities.