Short notes

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  • Created by: Chenna05
  • Created on: 07-10-20 07:31
What is Market failure ?
When the market forces of demand and supply are unable to efficiently allocate resources leading to net welfare loss in society
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What are externalities ?
The effects incurred by a third party who is neither a producer or consumer and is ignored by the price mechanism
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What are positive externalities ?
The divergence between social benefit and private benefit / the difference in marginal social benefit and marginal private benefit
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Name three other terms that can be used instead of positive externalities .
External benefit
Indirect benefit
Positive spillover effects
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What are negative externalities ?
The divergence between social cost and private cost / the difference between marginal social cost and marginal private cost
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Name three alternate terms for negative externalities .
Indirect cost
External cost
Negative spillover effect
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What is meant by private cost ?
Cost of production or consumption of a good or service incurred by a firm or an individual
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What is meant by private benefit ?
Satisfaction derived by a firm or an individual when producing or consuming a good or service
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Where is market equilibrium shown on an externality diagram ?
Where Marginal Private Cost (MPC) equals Marginal Private Benefit (MPB)
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What is the social equilibrium point and where is it shown on an externality diagram ?
Social equilibrium point is a govt. objective to maximize welfare and it is shown where the Marginal Social Cost (MSC) equals Marginal Social Benefit (MSB)
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Why does the Marginal Private Benefit (MPB) / demand curve shift downwards ?
Due to the law of diminishing marginal utility - as output increases, the additional satisfaction derived decreases
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What are public goods ?
Goods that are non - excludable and non - diminishable and are provided by the govt.
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What is meant by non - excludability / free rider problem ?
Public goods whose usage cannot by prevented by an individual

Eg : defence
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What is meant by non - rivalry / non - diminishability ?
Public goods, which once used does not reduce the amount available for others

Eg : street lights
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Why does the private sector not provide public goods ?
Free rider problem
Valuation problem
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What is meant by the valuation problem ?
Consumers tend to under value the benefit gained and producers tend to over value the benefit given hence a monetary value cannot be placed on a public good
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What are quasi - public goods ?
Goods that are excludable and non - rival (partially public and private goods)

Eg : Anyone can use the highway ,provided that they pay the toll
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What are merit goods ?
Goods that generate positive externalities
(under produced, under consumed and under priced)

Eg : education
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Why are merit goods under provided ?
Merit goods are under provided by the private sector as it generates positive externalities and as the private sector's main objective is profit maximization , they will not provide an adequate amount due to the free rider problem
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Why are merit goods under consumed ?
Because consumers have imperfect / asymmetric information about the external benefits generated
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What are demerit goods ?
Goods that generate negative externalities
(Over consumed, over produced and under priced)
Eg : tobacco
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What is meant by asymmetric information ?
A situation where either the buyer or seller or both lack the adequate necessary information to make an informed decision about the purchase or sale of a good or service
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Other cards in this set

Card 2

Front

What are externalities ?

Back

The effects incurred by a third party who is neither a producer or consumer and is ignored by the price mechanism

Card 3

Front

What are positive externalities ?

Back

Preview of the front of card 3

Card 4

Front

Name three other terms that can be used instead of positive externalities .

Back

Preview of the front of card 4

Card 5

Front

What are negative externalities ?

Back

Preview of the front of card 5
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