Markets Basics
This is the mechanism that coordinates supply and demand in a market.
Price Mechanism
This occurs when prices fail to reflect true social costs or benefits.
Market Inefficiency
Politicians often act in their own interest to win this from the public.
Votes
An economic activity that affects other people.
Side Effect
These are the two main actors that interact in markets.
Buyers and Sellers
One cause of market failure is when one side knows more than the other.
Information Asymmetry
This concept means voters do not study every policy because the benefit of being informed is too small.
Rational Ignorance
This type of externality happens when consumption creates benefits for other people besides the consumer.
Positive Consumption Externality
Markets are efficient when private costs and benefits equal these.
Social Costs and Benefits
Negative externalities usually cause this in the market.
Overproduction
This is when legislators exchange support for each other’s projects or policies.
Log-rolling
This type of externality occurs when a firm’s production harms others, such as through pollution.
Negative Production Externality
Resources are efficiently allocated when they go to their ______
Most Valued Use
Positive externalities usually lead to this problem.
Underproduction
Agencies that try to increase their own budgets and power show this behavior.
Bureaucratic Expansion
Traffic congestion caused by excessive car use is an example of this kind of externality.
Negative Consumption Externality
A competitive market is efficient only if there are no externalities, no market power, and this other condition.
Full Information
This happens when prices do not reflect true social costs or benefits.
Misallocation of Resources
A farm subsidy that costs each taxpayer little but gives lobbyists large gains shows this concept.
Concentrated Benefits & Diffuse Costs
This kind of externality appears when firms create benefits for society, such as innovation spillovers in clean-tech R&D.
Positive Production Externality