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19 terms

Microeconomics Market Failures

Ch 5 Market Failures: Public Goods and Externalities
STUDY
PLAY
Demand-side market failures
happen when demand curves do not reflect consumers' full willingness to pay for a good or service
Supply-side market failures
occur when supply curves do not reflect the full cost of producing a good or service
Consumer Surplus
the difference between the max price a consumer is willing to pay for a product and the actual price that they do pay
Producer Surplue
the difference between the actual price a producer receives and the minimum acceptable price that a consumer would have to pay the producer to make a particular unit of output available
Productive Efficiency
achieved because competition forces orange growers to use the best technologies and combinations of resources available. Doing so minimizes the per-unit cost of the output produced
Allocative Efficiency
achieved because the correct quantity of oranges is produced relative to other goods and services (equilibrium)
Efficiency Losses/Deadweight Loss
reductions of combined consumer and producer surpluses; result from both underproduction and overproduction
Private Goods
goods offered for sale in stores, shops, and Internet
Rivalry in consumption
when one person buys and consumes a product, it is not available for another person to buy and consume
Excludability
sellers can keep people who do not pay for a product from obtaining its benefits
Public Goods
distinguished by nonrivalry and nonexcludability
Nonrivalry (in consumption)
one person's consumption of a good does not preclude consumption of the good by others. Everyone can simultaneously obtain the benefit from a public good such as national defense, street lighting, etc.
Nonexcludability
no effective way of excluding individuals from the benefit of the good once it comes into existence. Once in place, you can not exclude someone from benefiting from national defense, street lighting, etc.
Free-rider problem
Once a producer has provided a public good, everyone, including nonpayers, can obtain the benefit
Cost-benefit analysis
deciding whether to provide a particular public good and how much of it to provide
Marginal-cost-marginal-benefit rule
tells us which plan provides the max excess of total benefits over total costs, aka the plan that provides society with the max net benefit
Quasi-public goods
public goods which provide some exclusion such as education, streets, museums, etc.
Externality
when some of the costs or the benefits of a good or service are passed onto or "spill over to" someone other than the immediate buyer or seller; can be both + & -
Optimal reduction of an externality
when society's marginal cost and marginal benefit of reducing that externality are equal (MC=MB)