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Chapter 19 Vocab
Market Failure versus Government Failure
18
Business
03/16/2009

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Term
Market Failure
Definition
A a situation in which the invisible hand pushes in such a way that individual decisions do not lead to socially desirable outcomes.
Term
Government Failures
Definition
When the government intervention in the market to improve the market failure actually makes the situation worse
Term
Externalities
Definition
The effects of a decision on a third party that are not taken into account by the decision maker
Term
Negative externalities
Definition
When the effects of a decision not taken into account by the decision maker are detrimental to others.
Term
Marginal Social cost
Definition
The marginal private costs of production plus the cost of the negative externalities associated with that product
Term
Marginal social benefit
Definition
The marginal private benefit of consuming a good plus the benefits of the positive externalities resulting from consuming that good.
Term
Direct Regulation
Definition
The amount of a good people are allowed to use is directly limited by the government
Term
Efficient
Definition
Achieving a goal at the lowest cost in total resources without consideration as to who pays those costs.
Term
Inefficient
Definition
Achieving a goal in a more costly manner than necessary.
Term
Tax incentive program
Definition
A a program using a tax to create incentives for individuals to structure their activities in a way that is consistent with the desired ends.
Term
Effluent fees
Definition
Charges imposed by government on the level of pollution created..
Term
Market incentive plan
Definition
A plan requiring market participants to certify that they have reduced total consumption. Not necessarily their own individual consumption by a specified amount.
Term
Free rider problem
Definition
Idividuals' unwillingness to share in the cost of a public good
Term
Optimal policy
Definition
One in which the marginal cost of undertaking the policy equals the marginal benefit of that policy.
Term
Public Good
Definition
A good that is nonexclusive (no one can be excluded from its benefits) and nonrival (consumption one does not preclude consumption by others).
Term
Adverse Selection problem
Definition
A a problem that occurs when buyers and sellers have different amounts of information about the good for sale.
Term
Signaling
Definition
An action taken by an informed party that reveals information to an uninformed party that offsets the false signal that caused the adverse selection problem in the first place.
Term
Positive externality
Definition
When the effects of a decision not taken into account by the decision maker are beneficial to others.