Booklet 6 - market failure ( key words)

Adverse selection

where a person at risk is more likely to take out insurance

Allocative efficiency

is achieved when consumer satisfaction is maximised

Asymmetric information

a situation in which participants in a market have better information about market contions than others

Demerit good

a good that brings less benefit to consumers than they expect, such as that too much will be consumed in a free market

External benefit

the benefit of consumption to third parties

External cost

the cost of production to third parties

Externality

A cost or benefit that is external to a market transaction, and is thus not reflected in market prices

Free rider problem

when an individual cannot be excluded from consuming a good and therefore has no insentive to pay for its provision

Government failure

is a misallocation of recourses arising from the government intervention that causes a divergence between marginal social benefit and marginal social cost

MEB ( marginal external benefit )

the benefit of consumtion to third parites

MEC ( marginal external cost)

the cost of production to third parties

MPB ( marginal private benefit )

The additional benefit to the firm or consumer involved in a private transaction from the consumption of one extra unit

MPC ( marginal private cost)

the cost to the firm or consumer involved in a private transaction from the production of one extra unit

MSB ( marginal social benefit )

the full benefit to society of producing one extra unit of the good

MSC ( marginal social cost )

the full cost to society of producing an extra unit of a good

Market failure

occurs when the free market mechanism does not lead to an optimal allocation of recourses. There is a divergence between marginal social cost and marginal social benefit

merit good

A good that brings unanticipated benefits to the consumer, such that society believes it will be consumed under a free market

Moral hazard

a situation where one party takes more risks because of the burden of those risks borne by another party

Non excludability

a situation in which it is not possible to provide a product to one person without allowing others to consume it as well

Non rivalry

a situtation in which one persons consumtion of a good does not prevent others from consuming it aswell

Private benefit

the benefit of an individuals economic activity that accrues to an individual

Private cost

A cost incurred by an individual as part of its production or other economic activities

Private goods

when consumed by one person, cannot be consumed by someone else - have excludability and rivalrous

Production externality

an externality that affects the production side of the market

Public good

Non excludable and non rivalrous

Quasi public good

a good which is non rivalrous and non excludable and rivalrous and excludable