Market failure and government intervention - Definitions

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Question Answer
Market failure: Where the free market mechanism fails to achieve economic efficiency.
Productive efficiency: Where production takes place using the least amount of scarce resources.
Economic efficiency: Where both allocative and productive efficiency are achieved.
Inefficiency: Any situation where economic efficiency is not achieved.
Free market mechanism: The system by which the market forces of demand and supply determine prices and the decisions made by consumers and firms.
Information failure: A lack of information resulting in consumers and producers making decisions that do not maximise welfare.
Asymmetric information: Information not equally shared between two parties.
Externality: An effect whereby those not directly involved in taking a decision are affected by the actions of others.
Third party: Those not directly involved in making a decision.
Private costs: The costs incurred by those taking a particular action.
Private benefits: The benefits directly accruing to those taking a particular action.
External costs: The costs that are the consequence of externalities to third parties.
External benefits: The benefits that accrue as a consequence of externalities to third parties.
Social costs: The total costs of a particular action.
Social benefits: The total benefits of a particular action.
Negative externality: This exists where the social cost of an activity is greater than the private cost.
Positive externality: This exists where the social benefit of an activity exceeds the private benefit.
Merit goods: These have more private benefits than their consumers actually realise.
Demerit goods: Their consumption is more harmful than is actually realised.
Public goods: Goods that are collectively consumed and have the characteristics of non-excludability and non-rivalry.
Non-excludability: Situation existing where individual consumers cannot be excluded from consumption.
Free rider: Someone who directly benefits from the consumption of a public good but who does not contribute towards its provision.
Non-rivalry: Situation existing where consumption by one person does not affect the consumption of all others.
Quasi-public goods: Goods having some but not all of the characteristics of a public good.
Direct tax: One that taxes the income of people and firms and that cannot be avoided.
Indirect tax: A tax levied on goods and services.
Polluter pays principle: Any measure, such as a green tax, whereby the polluter pays explicitly for the pollution caused.
Subsidy: A payment, usually from government, to encourage production or consumption.
Tradable permit: A permit that allows the owner to emit a certain amount of pollution and that, if unused or only partially used, can be sold to another polluter.