Asymmetric information:

1a

is also known as imperfect knowledge.

It occurs where one party has different
information to another.
.e.g. is when selling a car, the owner is likely to
have full knowledge about its service history and
likelihood to break down. The potential buyer, by
contrast, will be in the dark and he may not be
able to trust the car salesman.
1b

Cap and trade system:

2a

when countries/ firms are given a

limited emission that allows them to
pollute. Only to a certain level.
2b

Clean technologies:

3a

is usually described when

companies deal in energy, water,
transportation, agriculture and
manufacturing.
3b

Common access resources:

4a

are resources that are natural and

non- renewable such as forest, fishing
grounds and etc. Because such
resources are non-excludable the
society easily misuse such resources.
.e.g. Overfishing.
4b

Common pool resources:

5a

is a resource that benefits a group of people, but which

provides diminished benefits to everyone if each individual
pursues his/ her own self interest. The value of a commonpool resource can be reduced through overuse because the
supply of the resource is not unlimited, and using more than
can be replenished can result in scarcity. Overuse of a
common pool resource can lead to the tragedy of the
commons problem.
.e.g. forests.
5b

Demerit goods:

6a

are goods/services that the government

thinks are harmful to the people and
society. The government either imposes
taxes such goods or simply ban (make
these goods illegal) such goods so the
people don't access such harmful goods.
.e.g. Alcohol and Cigarettes.
6b

Externality:

7a

when the production of a

good/service has an unintended
effect on a third party.
.e.g. Electronic factories harm
rivers- affects the villagers as the
chemicals contaminate the rivers.
7b

Imperfect competition:

8a

is a competitive market situation where there are

many sellers, but they are selling heterogeneous
(dissimilar) goods as opposed to the perfect
competitive market scenario.
.e.g. If a seller is selling a non identical good in the
market, then he can raise the prices and earn profits.
High profits attract other sellers to enter the market
and sellers, who are incurring losses, can very easily
exit the market.
8b

Market failures:

9a

exists whenever the free market

equilibrium quantity of output is
greater or less than the socially
optimal level of output. The free
market will produce either too much
of a good or too little.
9b

Merit goods:

10a

are goods/services that the government

thinks are positive beneficial to the people
and society. Government either subsidises
or provides the merit goods themselves in
order for everyone (including the low
incomes) to access such goods.
.e.g. Education and Health care.
10b

Monopoly power:

11a

is an imperfect competitor that

restricts outputs in order to raise
prices to maximise profits.
11b

Negative externalities of
consumption:

12a

when the marginal private benefit (MPB) is greater

than the marginal social benefit (MSB); causing an
overallocation of a good/service. There are spillover
costs resulting from the consumption of the product
born by society as a whole.
.e.g. When consumers buy a cigarettes, the benefit to
society is lower than the benefit to the individual (in
this case, society is harmed by all the second-hand
smoke).
12b

Negative externalities of
production/external costs:

13a

when the Marginal social cost (MPS) is greater than the

Marginal private cost (MPC); causing an overallocation of a
good/service.
.e.g. Pollution.
Firms never consider their pollution affecting the society
(.e.g.water streams). This costs the society hefty in terms of
healthcare costs. In the graph below, demonstrates that the
Society (MSC) wants the good/service to be produced much
less (Q2) compared to what the firms produce-more (Q1).
Therefore, causes an overallocation of such product.
13b

Non-excludable:

14a

is a good/service that can not

prevent other people from using the
good/service at free charge.
.e.g. street lights, bridge etc.
14b

Non-rivalrous:

15a

is a good that many can consume at

the same time, at no additional cost.
.e.g. national defence, piece of
scientific knowledge etc.
15b

Positive externalities of
consumption:

16a

when the Marginal social benefit

(MSB) is greater than Marginal
private benefit (MPB); causing an
under allocation of the good/service.
.e.g. Home improvement loans in a
city.
16b

Positive externalities of
production/external costs:

17a

when the Marginal social cost(MSC) is greater than the Marginal

private cost (MPC); causing an under allocation of the good/service.
.e.g. Research and development of drugs.
When producers pay millions of dollars to discover a new way of
doing something, then all of society benefits greatly. However, the
firm itself paid a high cost (millions of dollars) for the research. If
everyone gets more benefit from the research than the firm itself, it is
unlikely to continue doing such research. There is a separation
between the cost to the individual firm, and the cost to society. We
need to somehow encourage the firm to continue producing their
goods as society wants Q2 but we are only at Q1.
17b

Public goods:

18a

is is a good that is non-excludable

and non- rivalrous.
.e.g. street lights, national defences
etc.
18b

Pure public good:

19a

is a good/service that provides nonexcludable and non-rivalrous

benefits to all people in the
population.
.e.g. Light houses, Clean air etc.
19b

Sustainability:

20a

in an economic aspect; it is the

ability to support a defined level of
economic production indefinitely.
20b