Key Terms F581 - Chapter 3

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Market Failure
where the free market mechanism 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 consumers 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 whereby 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 parties
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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 cost of an activity is greater than the 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
goods 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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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 another polluter
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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 another polluter
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Other cards in this set

Card 2

Front

Productive Efficiency

Back

where production takes place using the least amount of scarce resources

Card 3

Front

Economic Efficiency

Back

Preview of the front of card 3

Card 4

Front

Inefficiency

Back

Preview of the front of card 4

Card 5

Front

Free Market Mechanism

Back

Preview of the front of card 5
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