Theme 1 - Market failure and externalities

  • Created by: becky.65
  • Created on: 07-05-17 21:04
What are private costs?
For a producer, it is the costs the firm pays in order to produce the good or service. Private cost for a consumer involves giving up some income in order to consume the product
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What are some private costs?
Price of car and deprecitation, running costs, tax and insurance
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What are private benefits?
For a producer, it includes the profits made and the fulfilment of business objectives. Private benefits for the consumer are buying goods that satisfy their needs and wants
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What are some private benefits?
Independance, convenience, access to work, access to leisure
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What are external costs?
Costs or negative side-effects imposed on a third party who is neither the producer nor the consumer
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What are some external costs?
Pollution may cause illness, congestion increases costs of transportation, accidents may happen and impact on infrastructure
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What are external benefits?
Benefits or positive side-effects that benefit a third party who is neither the producer nor the consumer
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What are externalities?
Positive or negatives effects on third parties
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What are social costs?
The total costs of producing goods and services and are calculated by adding the private and external costs
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What are social benefits?
The total benefits of producing goods and services and are calculated by adding together the private and external benefits
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What are positive externalities?
External benefits that are experienced by a third party
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What are negative externalities?
External costs that have a detrimental effect on a third party
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What are the allocation of resources?
The way resources are used and distributed within the economic system
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When are markets working well?
When social costs are equal in value to soical benefits
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What is market failure?
It occurs whenever social costs exceed social benefits, meaning that there are negative externalities
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What is under-consumption?
It occurs when products that are socially desirable are too expensive for everyone to cover the costs themselves - healthcare and education
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What is over-consumption?
It occurs when social costs exceed private costs - if the consumer had to pay the external costs as the private costs then the demand would decrease
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How does market failure occur?
When negative externalities create spillover effects, there is over-production and over-consumption, some desirable products will be under-produced and under-consumed because it cuts out potential benefits in society, if a firm has market power
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How can market failure be addressed?
Government can intervene, creating various legal and procedural frameworks that reduce market failure
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Other cards in this set

Card 2

Front

What are some private costs?

Back

Price of car and deprecitation, running costs, tax and insurance

Card 3

Front

What are private benefits?

Back

Preview of the front of card 3

Card 4

Front

What are some private benefits?

Back

Preview of the front of card 4

Card 5

Front

What are external costs?

Back

Preview of the front of card 5
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