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market failures

the inablility of a market to bring about the allocation of resources that best satisfies the wants of society; in particular, the overallocation or underallocation of resources to the production of a particular good or service because of externalities of informational problems or because arkets do not provide desired public goods

demand-side market failures

under-allocations of resources that occur when private demand curves understate consumers; full willingness to pay for a good or service

supply-side market failures

over-allocations of resources that occur when private supply curves understate the full cost of producing a good or service

consumer surplus

the difference between the maximum price a consumer is (or consumers are) willing to pay for an additional unit of a product and its market price; the traingular area below the demand curve and above the market price.

producer surplus

the difference btween teh actual price a producer receives (or producers receive) and the minimum acceptable price; the triangular area above the supply curve and below the market prices

efficiency losses (deadweight losses)

reductions in combined consumer and producer curplus caused by an under allocation or over allocation of resources to the production of a good or service.

private goods

a good or service that is individually consumed and that can be profitably provided by privately owned firms because they can exclude non-payers from receiving the benefits


(1) The characteristics of a priate good, the consumption of which by one party excludes other parties from obtaining the benefit; (2) the attempt by one firm to gain strategic advantage over another firm to enhance market share or profit


the characteristic of a private good, for which the seller can keep nonbuyers from obtaining the good

public goods

a good or service that is characterized by nonrivalry and nonexludability; a good or service with these characteristics provided by government


the idea that one person's benefit from a certain good does not reduce the benefit available to others; a characteristic of a public good


the inability to keep nonpayers (free riders) from obtaining benefits from a certain good; a characteristic of a public good

free-rider problem

the inability of potential providers of an economically desirable good or service to obtain payment from those who benefit, because of nonexludability

cost-benefit analysis

a comparison of the marginal costs of a government project or program with the marginal benefits to decide whether or not to employ resources in that project or program and to what extent

quasi-public goods

a good or service to which excludability could apply that has such a large positive externality that government sponsors its production to prevent an underallocation of resources


a cost or benefit from production or consumption, accruing without compensation to someone other than the buyers and sellers of the product

Coase theorem

the idea, first stated by economist Ronald Coase, that some externalities can be resolved through private negotiations of the affected parties

optimal reduction of an externality

the reduction of a negative externality such as pollution to the level at which the marginal benefit and marginal cost of reduction are equal

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