Definitions: Market failure and government intervention

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Market failure
Where the free market mechanise fails to achieve economic efficiency
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Productive efficiency
Where production takes place using the least amount of scarce resources
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Economic efficiency
Where both allocative and productive efficiency are achieved
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Inefficiency
Any situation where economic efficiency is not achieved
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Free market mechanism
The system by which the market forces of demand and supply determine prices and the decisions made by consumers and firms
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Information failure
A lack of information resulting in consumer and producers making decisions that do not maximise welfare
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Asymmetric information
Information not equally shared between two parties
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Externality
An effect hereby those not directly involved in taking a decision are affected by the actions of others
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Third party
Those not directly involved in making a decision
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Private costs
The costs incurred by those taking a particular action
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Private benefits
The benefits directly accruing to those taking a particular action
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External costs
The costs that are the consequences of externalities to third parties
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External benefits
The benefits that accrue as a consequence of externalities to third party
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Social costs
The total costs of a particular action
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Social benefits
The total benefits of a particular action
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Negative externality
This exists where the social costs of an activity is greater than a private cost
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Positive externality
This exists where the social benefit of an activity exceeds the private benefit
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Merit goods
These have more private benefits than their consumers actually realise
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Demerit goods
Their consumption is more harmful than is actually realised
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Public goods
Good that are collectively consumed and have the characteristics of non-excludability and non-rivalry
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Non-excludability
Situation existing where individual consumers cannot be excluded from consumption
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Free rider
Someone who directly benefits from the consumption of a public good but who does not contribute towards its provision
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Non-rivalry
Situation existing where consumption by one person does not affect the consumption of all others
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Quasi-public goods
Goods having some but not all of the characteristics of a public good
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Direct Tax
One that taxes the income of people and firms and that cannot be avoided
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Indirect tax
A tax levied on goods and services
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Polluter pays principle
Any measure, such as a green tax, whereby the polluter pays explicitly for the pollution caused
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Subsidy
A payment, usually from government, to encourage production or consumption
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Regulations
Are standards and legal controls set by the government
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Tradable Permit
A permit that allows the owner to emit a certain amount of pollution and that, if unused or only partially used, can be sold to other user
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Other cards in this set

Card 2

Front

Where production takes place using the least amount of scarce resources

Back

Productive efficiency

Card 3

Front

Where both allocative and productive efficiency are achieved

Back

Preview of the back of card 3

Card 4

Front

Any situation where economic efficiency is not achieved

Back

Preview of the back of card 4

Card 5

Front

The system by which the market forces of demand and supply determine prices and the decisions made by consumers and firms

Back

Preview of the back of card 5
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