Externalitys

externalitys and market failure

what is market failure

When the price mechanism lead leads to an inefficient allocation of resources and deadweight loss of economic welfare

What is another name for market failure?

Allocative inefficiency

What are the causes for market failure?

• Externalities

• Under provision of public goods

• Information gaps

What is complete market failure?

There is no market whatsoever

What is partial market failure?

Occurs when a market exists, but there is a miss allocation of resources

What are externalities?

Costs and benefits to a third-party created by economic agents undertaking their activity

What are negative externalities?

Costs to a third-party that are not included in the price of the economic activity

• A.k.a. External costs.

What are merit goods?

Good which are better for the consumers than they realise therefore under consumed e.g. vaccinations

What are demerits?

Good which are was for consumers and they realise therefore over consumed e.g. smoking

What are positive externalities?

Benefits to a third-party that are not included in the price of the economic activity

• A.k.a. External benefits.

What are private cost?

The cost of consuming or producing goods/services that have to be paid for by an individual firm for that economic activity

What are social costs?

The total costs of consuming or producing goods paid for society

Private costs + external costs = social costs

What leads to negative externalities?

When private costs are greater than social costs, we have negative externalities.

What are positive externalities?

The difference between private benefits and social benefit benefits

What are negative externalities?

The difference between private costs and social costs

What are private benefits?

The benefits of consuming or producing goods/services that are received by an economic unit, example individual/firm

What does social benefits?

The benefits of consuming or producing goods out of received by society

Social benefits = positive benefits + external benefit benefits

what is the nature of negitive externalitys of production

• Costs to the third party due to actions of producers 

• MSC>MPC 

• msc=mpc+ec

For example Fossil fuels = air polution

• this is due to self intrest of producers leading to overproduction and thus consumption and a missalocation of reacorces

demand stays the same

costs =

suply

benifits =

demand

where do consumers and producers opperate at on externality diagrams

private optimum

what type of externality

negitive externality on production

what is the nature of positive externalitys of consumption

• benifits to third party from conumers actions 

• MSB > MPB

• example vacinations = less spread 

• msb= mpb + positive eb

• this leads to an underconsumption due to self intrest of consumers and a misalocation of reacorces

what externality is this

what is the nature of positive externalitys on producers

• benifits to third party due to producers

• example- training prodrams for employers = other firms

• MSC>MPC

• sc=pc+ec

• leads to under production due to self intrest of the producer

what externality is this?

positive externality of production

negitive externalitys of condumprion

• costs to 3rd party due to consmption of other

• eg. Smoking = efect on NHS and 2nd hand smoke

• MSB<MPB

• SB=PB +negitive EB

• leads to overconsumption due to consumers self interest and misallocation of reacorces

what externality is this?

negitive externalitys on consumers