AS REVISION: Chapter Three

Market failure occurs where the free market mechanism fails to achieve economic efficiency.

Productive efficiency is where production takes place using the least amount of scarce resources.

Economic efficiency is where both allocative and productive efficiency are achieved.

Inefficiency is any situation where economic efficiency is not achieved.

Free market mechanism is the system by which the market forces of demand and supply determine prices and decisions made by consumers and firms.

Information failure is a lack of information resulting in consumers and producers making decisions that do not maximise welfare.

Asymmetric information is information not equally being shared between two parties.

Externality is an effect whereby those not directly involved in taking a decision are affected by the actions of others.

Third party are those not directly involved in making a decision.

Private costs are the costs incurred by those taking a particular action.

Private benefits are the benefits directly accruing to those taking a particular action.

External costs are the costs that are the consequence of externalities to third parties.

External benefits are benefits that accrue as a consequence of externalities to third parties.

Social costs are the total costs of a particular action.

Social benefits are the total benefits of a particular action.

Negative externality exists where the social cost of an activity is greater than the private cost.

Positive externality exists where the social benefits of an activity exceeds the private benefit.

Merit goods are goods that have more private benefits than their consumers actually realise.

Demerit goods are goods that have a more harmful consumption than is actually realised.

Public goods are goods that are collectively consumed and have the characteristics of non-excludability and non-rivalry.

Non-excludability is the situation existing where individual consumers cannot be excluded from consumption.

Free rider is someone who directly benefits from the consumption of a public good but who does not contribute towards its provision.

Non-rivalry is the situation existing where consumption by one person does not affect the consumption of all others.

Quasi-public goods are goods having some but not all of the characteristics of a public good.

Direct tax is one that taxes the income of people and firms and that cannot be avoided.

Indirect tax is a tax levied on goods and services.

Polluter pays principle is any measure, such as a green tax, whereby the polluter pays explicitly fro the pollution caused.

Subsidy is a payment, usually from the government, to encourage production or consumption.

Tradable permit is 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.