|Where the free market mechanism fails to achieve economic efficiency.
|Where production takes place using the least amount of scarce resources.
|Where both allocative and productive efficiency are achieved.
|Any situation where economic efficiency is not achieved.
|Free market mechanism:
|The system by which the market forces of demand and supply determine prices and the decisions made by consumers and firms.
|A lack of information resulting in consumers and producers making decisions that do not maximise welfare.
|Information not equally shared between two parties.
|An effect whereby those not directly involved in taking a decision are affected by the actions of others.
|Those not directly involved in making a decision.
|The costs incurred by those taking a particular action.
|The benefits directly accruing to those taking a particular action.
|The costs that are the consequence of externalities to third parties.
|The benefits that accrue as a consequence of externalities to third parties.
|The total costs of a particular action.
|The total benefits of a particular action.
|This exists where the social cost of an activity is greater than the private cost.
|This exists where the social benefit of an activity exceeds the private benefit.
|These have more private benefits than their consumers actually realise.
|Their consumption is more harmful than is actually realised.
|Goods that are collectively consumed and have the characteristics of non-excludability and non-rivalry.
|Situation existing where individual consumers cannot be excluded from consumption.
|Someone who directly benefits from the consumption of a public good but who does not contribute towards its provision.
|Situation existing where consumption by one person does not affect the consumption of all others.
|Goods having some but not all of the characteristics of a public good.
|One that taxes the income of people and firms and that cannot be avoided.
|A tax levied on goods and services.
|Polluter pays principle:
|Any measure, such as a green tax, whereby the polluter pays explicitly for the pollution caused.
|A payment, usually from government, to encourage production or consumption.
|A permit that allows the owner to emit a certain amount of pollution and that, if unused or only partially used, can be sold to another polluter.