Micro Exam 2

Market failure

Competitive market system produces the "wrong" amounts of certain goods or services or fails to provide any at all.

Demand-side market failures

Happen when demand curves do not reflect consumers' full willingness to pay for a good or service.

Supply-side market failures

Occur when supply curves do not reflect the full cost of producing a good or service.

Underproduction

Quantity of specific goods falls from the efficient level to a smaller amount, leading to efficiency loss or deadweight loss.

Overproduction

Quantity of a specific good exceeds the efficient level, resulting in a decline in total surplus.

Efficiency loss (deadweight loss)

Reductions in combined consumer and producer surplus caused by misallocation of resources.

Private goods characteristics

Goods offered for sale in stores, characterized by rivalry and excludability.

Public goods characteristics

Goods distinguished by nonrivalry and nonexcludability, like highways and law systems.

Quasi-Public goods characteristics

Goods produced by private firms but not highly profitable, like education and streets.

Free-rider problem

Situation where nonpayers benefit from a public good provided by others.

Positive externalities

Example of demand-side failure leading to underproduction.

Negative externalities

Example of supply-side failure leading to overproduction.