Market failure and government intervention

Definitions from chapter three...

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 condumers 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 action of others.

Third Party: Those not directly involved in making a decision.

Private Cost: The costs incurred by those taking a perticular action.

Private Benefits: The benefits directly accuring to those taking a particular action.

External Cost: The cost that the consequence of externalities to third parties.

External Benefits: The benefits that accure 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 exist where te 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 invidual consumers cannot be excluded from consumption.

Free-riders: 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 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 causes.

Subsidy: A payment, usally from government, to encourage production or consumption.

Tradable Permit: A permit that allows the owner to emit a certain amout of pollution and that, if unused or only partically used, can be solt to another polluter.