6.1: Market Economies (copy)

What does the term 'invisible hand' in free markets refer to?

The concept that businesses have the incentive to meet societal demands to earn profit.

What is information asymmetry?

A situation in which one party is more informed than another because of the possession of private information.

What is adverse selection in economic terms?

A situation where parties involved in a transaction fear that negative information about the other party, goods, or services, is unknown to them.

What is moral hazard?

A market failure that results from a change in the buyer’s behavior after a purchase, believing that losses will be passed onto the seller.

Define market failure.

A situation in which the free-market system fails to satisfy society’s wants.

What are the four types of market failures?

Public goods, externalities, imperfect competition, and unequal distribution of income.

What does 'socially optimal quantity' mean in terms of supply and demand?

When marginal social benefit (MSB) equals marginal social cost (MSC).

What is an externality?

A third-person side effect that can result in external benefits or external costs to someone other than the original decision maker.

What are negative externalities?

Situations that result in a cost for someone other than the original decision maker, where costs spill over to other people in society.

Give an example of a positive externality.

Flu vaccines, which provide benefits to people other than the original decision maker.