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Microeconomics Schedule E: Market Failure


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Market failure
Where the free market mechanism fails to achieve economic efficiency
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 decisions 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 decision.
Private benefits
The benefits directly incurred by 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 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
Non-excludability
Situation existing where individual consumers cannot be excluded from consumption
Non-rivalry
Situation existing where consumption by one person does not affect the consumption of all others
Free rider
Someone who directly benefits from the consumption of a public good but who does not contribute towards its provision
Quasi-public good
A good that has some but not all of the characteristics of a public good