Government and Market failure

Scholarship Economics

market failure

When supply and demand operate in an inequitable or inefficient manner. Consumer surplus and producer surplus is not maximised

positive externalities of consumption

Beneficial effects (spillovers) that are enjoyed by a third party when a good is used

positive externalities of production

beneficial effects (spillovers) that are enjoyed by a third party when a good is made

negative externalities of consumption

harmful effects (spillovers) that are suffered by a third party when a good or service is used

negative externalities of production

harmful effects (spillovers) that are suffered by a third party when a good or service is made

marginal (private) benefit (MB)

Amounts that an individual consumer receives from using a good or service

Marginal social benefit (MSB)

The addition of the private benefit and the externalities (spillovers). MSB = MB +Spillovers

Marginal (private ) cost (MC)

Amouns that an individual firm must pay to produce a good or service

Marginal social cost (MSC)

The addition of the private cost and the externalities (spillovers). MSC = MC spillovers

Allocative efficiency

The combined area of consumer surplus and producer surplus is maximised

deadweight loss

Area of consumer and or producer surplus (welfare) not transferred to another group

internalisation

making the individual/ group that produces or consumes a good with externalities responsible for the externalities

government provision

When the state gives out the good or service

regulations

Rules / laws that affect the consumption / production of a good/ service

indirect tax

Payments by firms to the government

subsidy

payments by the government to firms

education

Government spending to increase understanding and changes people’s behavior

equity

A situation that is fair/just