Topic 6

Market Failure

This is inefficient allocation of resources, potentially with adverse consequences for individuals/ and or society

Social Efficiency

Optimal distribuitions of resources in society
This occurs at Marginal Social Benefit (MSB) = Marginal Social Cost (MSC)

MSB > MSC

More production/consumption needed

MSC > MSB

Less consumption/production needed

Marginal Social Benefit

MSB is the total benefit to society from consuming one more unit of a good or service.

It includes:

• Private benefit (benefit to the individual consumer)

• External benefit (benefit to third parties / society)
  Example:
  A flu shot:

• Private benefit: You don’t get sick.

• External benefit: You don’t spread illness → society benefits.

Marginal Social Cost

MSC is the total cost to society from producing one more unit of a good or service.

It includes:

Private cost (cost to firms)
External cost (cost to third parties / society)
Example
A factory producing clothes:

• Private cost: Labour, materials.

• External cost: Pollution harming nearby residents.

First Mover Problem (Why do Markets Fail)

The first-mover problem refers to situations where firms are unwilling to enter a new market or produce a socially beneficial good because the initial firm would incur all the costs, while later firms could copy and benefit.

Free Rider Problem (Why do Markets Fail)

The free rider problem occurs with public goods because they are non-excludable and non-rival.
This means individuals can consume the good without paying, so they "free ride" on others’ contributions leading to price hikes or abandonment.

Bank of England Inflation Target

2% per annum

Progressive Taxation

You are taxed more the more you earn

Fiscal Drag

As income rises, more people move into higher tax brackets so government has more money and consumers have less to spend

Trickle Down Economics

Trickle-down economics is the theory that giving tax cuts or financial benefits to the wealthy and businesses will lead to increased investment, job creation, and broad economic growth. The idea is that these gains at the top will eventually “trickle down” to the rest of society.

Trickle Down Economics example

A government cuts taxes for large corporations so they have more money to invest in new factories, equipment, and workers. The expectation is that as these companies grow, they will hire more people and raise wages, allowing the wider population to benefit indirectly.

Disadvantages of Inflation

Causes people to spend money now as thhey think it will be worth less in future. This creates a loop fuelling inflation
People on fixed incomes/holding cash become poorer