Where the free market mechanism fails to achieve economic efficiency.
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Free Market Mechanism
The system by which the market forces of demand and supply determine prices and 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 where those no directly involved in making a decision are affected by the action 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. (Private Costs + External Costs)
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Social Benefits
The total benefits of a particular action. (Private Benefits + Social Benefits)
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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 goods have more private benefits than the consumers actually realise.
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Demerit Goods
The consumption of these goods is more harmful than consumers actually realise.
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Public Goods
Goods that are collectively consumed and have 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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Non-Rivalry
Situation existing where consumption by one person does not affect the consumption of others.
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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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Quasi-Public Goods
Goods having some but not all of the characteristics of a public good.
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Direct Tax
Compulsory charges imposed by the government on the income of individuals and firms.
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Indirect Tax
Tax levied on goods and services.
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Progressive Tax
As income rises a progressive tax takes a higher percentage of income. The rich pay a larger percentage of their income tax than the poor.
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Proportional Tax
As income rises a proportional tax takes the same percentage of income. The rich pay the same percentage of their income in tax as the poor.
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Regressive Tax
As income rises a regressive tax takes a smaller percentage of income. The rich pay a smaller percentage of their income than the poor.
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Specific Indirect Tax
A tax that is a fixed amount per unit.
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Ad Valorem Indirect Tax
A tax such as VAT - tax is a percentage of the selling price.
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Polluter Pays Principle
Any measure, such as green tax, whereby the polluter pays explicitly for the pollution caused.
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Subsidy
A payment made by the government, to consumers or producers, to encourage consumption or production.
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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 polluting firm.
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Other cards in this set
Card 2
Front
The system by which the market forces of demand and supply determine prices and decisions made by consumers and firms.
Back
Free Market Mechanism
Card 3
Front
A lack of information resulting in consumers and producers making decisions that do not maximise welfare.
Back
Card 4
Front
Information not equally shared between two parties.
Back
Card 5
Front
An effect where those no directly involved in making a decision are affected by the action of others.
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