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Edexcel Economics Theme 1.3
Terms in this set (28)
What is the definition of market failure?
Where the market mechanism doesn't result in socially optimum quantity or price
Name 3 types of market failure
Information failure, externalities, public goods
What is an external benefit?
A benefit to a third party outside the transaction
What is an external cost?
A cost to a third part outside the transaction
What is a social benefit?
The total benefit to private individuals and third parties: Private benefit plus External benefit
What is a social cost?
The total cost to private individuals and third parties: Private cost plus External cost
On a negative production externality diagram, how do you find socially optimum equilibrium?
Where MB (MSB) meets MSC
On a negative production externality diagram, how do you find private equilibrium?
Where MB (MSB) meets MPC
On a negative production externality diagram, how do you find Under/over consumption in a private market?
Overconsumption - the difference between the quantity at social equilibrium and at private equilibrium
On a positive consumption externality diagram, how do you find social equilibrium?
Where MC (MSC) meets MSB
On a positive consumption externality diagram, how do you find private equilibrium?
Where MC (MSC) meets MPB
On a positive consumption externality diagram, how do you find under/over consumption in a private market?
Underconsumption, the difference between the quantity at social equilibrium and at private equilibrium
What are the two features of public goods?
Non-excludability and Non-rivalry
What is the name for a good which displays only one feature?
What is non-excludability?
You can't stop someone consuming it once it has been provided
What is non-rivalry?
One person's consumption does not affect another's
What is the free rider problem?
where consumers can consume good without paying for it because it is non-excludable
Are public goods under- or over-consumed in the free market and why?
Underconsumed because no-one wants to pay for them; they all want to free-ride on someone else's purchase
Give a reason why governments may choose not to provide public goods
Expense, adverse consequences, crowding out, government inefficiency
Give an alternative to full state provision
Subsidisation, public-private partnerships
What is information asymmetry?
Where one party in a transaction knows more than another
Why is information asymmetry a form of market failure?
It can lead to a suboptimal level of output
What is adverse selection?
Where infomation asymmetry leads to a narrower market
What is moral hazard?
Where one party changes their behaviour after a transaction
How can independent reviews help moral hazard?
People are less likely to change their behaviour if they know it may affect their future transactions
What are the disadvantages of independent reviews?
They can be faked or sabotaged.
What are merit goods? (Edexcel)
Goods which would be demanded more if consumers had full information
What are demerit goods? (Edexcel)
Goods which would be demanded less if consumers had full information
Recommended textbook explanations
Principles of Economics
N. Gregory Mankiw
Krugman's Economics for AP*
David Anderson, Margaret Ray
William A. McEachern
Operations and Supply Chain Management
F Jacobs, Richard Chase
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