Theme 1 (Micro)- 1.3

• Market failure


  When the market fails to allocate resources efficiently leading to a social welfare loss
• Externalities


  Cost/benefits a third party receives from an economic transaction outside the market mechanism.
• Public goods


  Goods that are non rival and non-excludable.
• Public goods are underprovided by the private sector due to the free rider problem.
• Information gaps


  Firms do not always have perfect information leading to a misallocation of resources.
• Private costs/benefits


  Costs/benefits to an individual participating in an economic transaction
• External benefits/costs


  costs/benefits to a third party not involved with the economic transaction.
• Social costs/benefits


  Costs/benefits to society as a whole
• Merit good


  Good with external benefits. MSB > MPB. Underprovided by the free market
• Demerit good


  Goods with external costs. MSC > MPC. Overprovided by the free market.
• MPB


  Marginal Private Benefit is the extra satisfaction gained by the individual from consuming one more of a good.
• MSB


  Marginal Social Benefit is the Extra gain to society from the consumption of one more good.
• MPC


  Marginal Private Cost is the extra cost to the individual from producing on more of the good
• MSC


  Marginal Social Cost is the extra cost to the society from the production of one more good.
• Negative Production Externality

  
• Positive Consumption Externality

  
• Taxes can be put on goods with negative externalities and Subsidies on goods with positive externalities which can help internalise the externalities
• Tradeable Pollution permits allows firms to produce a certain amount of pollution and can sell the right to pollute to other firms.
• When MSB for goods are high, the government may provide the good through taxation.
• The government can provide information to help people make informed decisions and acknowledge external costs.
• The government could limit consumption of goods with negative externalities through things like bans.
• Free rider problem


  You cannot charge an individual a price for the provision of a non - excludable good as someone else can gain the benefit from it without paying anything.
• Private sectors may not produce public goods as they won't be sure that they make a profit
• Symmetric information


  Where buyers and sellers have potential access to the same information.
• Asymmetric information


  When one party knows more than the other party meaning they could be taken advantage of.
• Technology can decrease information gaps as more people can get more information.
• Information gaps can lead to market failure as there is a misallocation of resources as people do not buy things that maximise their wealth.