Market Efficiency and Market Failures - Vocabulary

Vocabulary flashcards covering efficiency, deadweight loss, market failures (including anomalies, barriers to entry, monopolies), externalities, information asymmetries, and possible government interventions.

Market efficiency

A state in which resources are allocated to maximize social welfare; inefficiency leads to deadweight loss.

Deadweight loss

The loss of total welfare arising from market inefficiency (underproduction or overproduction relative to the efficient outcome).

Market failure

A situation where markets fail to allocate resources efficiently, leading to welfare losses.

Anomalies (producer-side market failure)

Market failures that originate from producers, such as high fixed costs and barriers to entry that reduce competition.

Barriers to entry

Obstacles that prevent new firms from entering a market (e.g., high fixed costs, regulation, credentialing).

Natural monopoly

A market structure where a single provider can serve the market at lower cost than multiple firms, often due to high fixed costs.

Regulation

Government rules to correct market failures, such as controlling entry, pricing, or quality standards.

Public enterprise

A government-owned firm created to supply a socially beneficial good or service.

Break up / Antitrust

Government action to dissolve or separate firms to promote competition and reduce market concentration.

Credentialing

Licensing or certification requirements that can raise barriers to entry and affect market competition.

Externality

A cost or benefit of a market transaction that affects third parties and is not reflected in the price.

Positive externality

A beneficial external effect (e.g., vaccination or education) that improves welfare beyond the private outcome.

Negative externality

An external cost (e.g., pollution) imposed on others not reflected in the market price.

Information asymmetry

A situation where one party has more information than another, leading to inefficiencies (adverse selection, moral hazard).

Government failure

When government intervention worsens welfare due to misaligned incentives or bureaucratic inefficiency.