Market Failure and Externalities (Edexcel A-Level Economics A): Flashcards
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Market failure definition
Market failure definition
When free markets fail to optimally allocate resources
Externality definition
Externality definition
Cost/benefit affecting third parties outside transaction
Social cost equation
Social cost equation
Private cost + external cost
Social benefit equation
Social benefit equation
Private benefit + external benefit
Private cost
Private cost
Cost incurred directly by firm or consumer
External cost
External cost
Cost imposed on third parties not reflected in market prices
Private benefit
Private benefit
Benefit received directly by individual/firm
External benefit
External benefit
Benefit society receives beyond the individual
Negative externality result
Negative externality result
Overproduction - more than socially optimal quantity produced
Positive externality result
Positive externality result
Under-consumption - less than socially optimal quantity consumed