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Level 42

Market Efficiency & Market Failure


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Consumer Surplus
Difference between what a consumer is willing to pay for a good the the amount actually paid
Producer Surplus
Gain from participating in a market- The difference between amount for which good sells and minimum amount necessary for seller to produce good
Community Surplus
The sum of producer surplus and consumer surplus
Why Marginal Benefit Slopes Downward
Law of diminishing marginal utility
Allocatively Efficient Level of Output
Socially optimal level of output
Merit Goods
Benefit the consumer and create positive externalities
Demerit Goods
Harm the consumer and create negative externalities
Non-Rivalry
Consumption does not prevent consumption by others
Non-Excludability
Sellers cannot prevent those who have not paid from consuming a product
Common Access Resources
Large-scale resources that are freely available to everyone and no one can be excluded from using
Tragedy of the Commons
Garrett Hardin (1968) - The exhaustion/overuse of common access resources to the point of total depletion
Adverse Selection
This happens before the transaction
moral hazard
the risk that one party to a transaction will engage in behavior that is undesirable from the other party's point of view