9708 · 7.3
Efficiency and market failure flashcards
Revision flashcards for Cambridge 9708 Efficiency and market failure (syllabus 7.3). Flip, recall, then mark a real past-paper question.
Card
What is allocative efficiency?
Resources are allocated so MSB = MSC — the socially optimal quantity is produced. No one can be made better off without making someone worse off (Pareto efficiency).
Card
What is productive efficiency?
Output is produced at the lowest possible average cost — firm operates at minimum ATC (or on the PPF boundary).
Card
What is market failure?
When the free market fails to allocate resources efficiently — MSB ≠ MSC at the market equilibrium quantity.
Card
Main types of market failure?
Externalities, public goods, information gaps (asymmetric information), merit/demerit goods, and market power (monopoly).
Card
What is deadweight loss (DWL)?
The welfare loss from producing too much or too little — the triangle between MSC and MSB curves over the range between Q_market and Q_social.
Card
Public goods and the free-rider problem?
Non-excludable and non-rival goods — individuals can benefit without paying, so the market underprovides them.
Card
What is Productive Efficiency?
A situation where goods or services are produced at the lowest possible average cost. The condition is P = minimum AC, where MC = AC. On a PPC, this is any point on the curve.
Card
What is Allocative Efficiency?
A situation where resources are allocated to produce the combination of goods and services most desired by society. The condition is Price = Marginal Cost (P=MC).
Card
Define Market Failure.
When the free market mechanism fails to allocate resources efficiently, leading to a net loss of social welfare. This occurs when the conditions for allocative or productive efficiency are not met.
Card
What is Deadweight Loss?
The loss of total surplus (consumer + producer) that results from a market not being in competitive equilibrium. It is a measure of the welfare lost due to inefficiency.
Card
What is Pareto Efficiency?
An economic state where resources cannot be reallocated to make one individual better off without making at least one individual worse off. It is another term for allocative efficiency.