IB - Market Failure Concepts
Terms in this set (21)
Failure of the market to achieve allocative efficiency, resulting in an over-allocation of resources (over- provision of a good) or an under-allocation of resources (under-provision of a good)
The price mechanism has determined an equilibrium, where no one can be made better off without making someone else worse off.
Costs or benefits related to a good or service that falls on others besides the buyers and sellers of that particular good or service
MPB (marginal private benefit) (D)
The D curve measures how much value a consumer gets from a good (b/c you pay that amount) - this = how much you benefit from that purchase
MPC (marginal private cost) (S)
The S curve measures how much a Ser has to be paid in order to produce that product - this = their private cost
The social market equilibrium (regulated equilibrium) includes spill over costs and benefits to society as a whole. (Where MSC=MSB)
Types of Externalities
Lack of public goods
A cost to society NOT paid
by the consumer or producer -
they pay the private, but not
external or "social" costs such as the loss of welfare b/c
these are ignored in the market - i.e. air pollution, traffic, global warming.
A benefit to society NOT
paid by the consumer or
producer - get it w/o paying
for it - i.e. pretty gardens, people who take public transport, an educated population
Goods That Create Negative Externalities
Goods that Create Positive Externalities
Economic problem (where some people will be able to enjoy the benefits of the good without paying a share of its costs)
Exists where consumption today (current generation) does not prevent consumption later (future generations)
Costs related to the consumption or production of good or service that falls on third party, buyers and sellers of that particular good or service. (similar to externality)
Loss in allocative efficiency resulting from operating at the free market equilibrium rather than the social equilibrium.
You can't use it unless you pay for it (i.e. your education or air flight)
People can not be kept from using it even if they don't pay (i.e. a country's defense, public gardens)
The use of something by one person prevents the use of it by another (i.e. your pen, a drink)
The use of something by one person doesn't diminish its use by others (i.e. radio waves, )
Rivalrous and exclusive (i.e. most things) eg. Air travel, one person sitting in a seat means that no one also can consume and non-payers can be excluded from flying.
Non-rivalrous and non-exclusive (i.e. Defense and national parks)
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