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Lesson Flashcards: Market Failure and the Role of the Government Economics

Public goods

Goods and services that are nonexcludable (cannot prevent other people from consuming them) and nonrivalrous (sharing them does not reduce their benefits to others), such as streetlights

Externality

A positive or negative secondary (societal) effect of the consumption of a good or service, such as education or pollution

The four classes of goods and services defined by their excludability and rivalry in consumption

Public goods, private goods, artificially scarce goods (club goods), and merit goods

Rivalry in consumption

A good or service is rivalrous or is a rival if its consumption by one individual reduces its benefits for others (for example, an apple eaten by one person cannot be eaten again by another)

Private ownership

A characteristic of a capitalist economy that refers to the rights of individuals in that economy to own tangible resources, such as factors of production, as well as intangible resources, such as financial instruments and intellectual rights (these individually owned resources are called private property)

Unemployment

The societal problem where individuals seeking to provide their labor factor of production cannot find opportunities

Privatization

The change of ownership or management of a production process from the government to individuals

Profit motive

A characteristic of a capitalist economy that means that the production of goods and services is driven by the profits they generate

Privatization of ownership

A type of privatization in which government-owned factors of production are wholly or partially sold to individuals in the private sector

The three pillars of capitalism

Private ownership, profit motive, and the market mechanism

A free market

An economic system without a government’s involvement in which the main participants are households and firms

The four main types of privatization

Privatization of ownership, privatization by outsourcing, privatization of management, and privatization by deregulation

Privatization of management

A type of privatization that includes a transformation of the management style in the public sector to resemble that of the private sector, although the government retains ownership of the factors of production

Public sector

The government-owned production enterprises in an economy, such as the national military, power grids, and public schools

Merit goods

Goods and services whose consumption creates additional benefits for society (positive externalities), such as education

Supply

The amount of goods and services firms are willing to produce at a given price

Privatization by deregulation

A type of privatization in which legal barriers are removed to enable the private sector to participate in a production process that used to be solely conducted by the government

Excludability

A good or service is excludable if it is possible and practical to prevent some individuals from consuming it (for example, a subscription TV service)

Inflation

A continual increase in the prices of goods and services over a long period of time

Privatization by outsourcing

A type of privatization in which the government uses the private sector to produce goods and services in exchange for financial compensation

Artificially scarce goods

Goods and services that are excludable (other people can be prevented from consuming them) and nonrivalrous (sharing them does not reduce their benefits to others), such as a toll bridge

Market mechanism

The process through which supply (producers) and demand (consumers) interact to determine the market price of a good or service

Private goods

Goods and services that are excludable (other people can be prevented from consuming them) and rivalrous (sharing them reduces their benefits to others), such as a car

Market failure

An inefficiency of a free market leading that, without government intervention, would lead to the wasted use of resources (for example, inadequate production of public goods such as public streets or national defense would require individuals to try to provide their own)

Demand

The amount of goods and services consumers are willing to purchase at a given price

Private sector

The individual-owned production enterprises (firms) in an economy

Underconsumption

A type of market failure in which relying only on firms for production leads to a level of consumption of goods that is insufficient to reach an optimal level for society, such as in the provision of education

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