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Market Failure
Occurs when the free market fails to allocate scarce resources at the socially optimal level of output.
Negative Externalities
Costs that affect third parties as a result of producers/consumers actions, leading to overproduction or consumption.
Public Goods
Goods that are non-excludable and non-rival, such as street lights and beaches, leading to the free-rider problem.
The benefit of the good cannot be confined to the individual
De-merit Goods
Goods deemed more harmful to consumers than they realize,
Consumers have imperfections information
often resulting in overconsumption.
Merit Goods
Goods that are deemed more beneficial to consumers than they realize, often resulting in underconsumption.
Common Access Resources
Natural resources with no private ownership, leading to exploitation until resource depletion occurs.
Government Failure
When the cost of government intervention outweighs the benefits, worsening resource allocation.
Reasons
1) information failure - valuing externalities, level of policy required
2) admin and enforcement cost very high
3) unintended consequences- black market
4) Regulatory capture - when regulating monopoly power
Indirect Tax
A tax that increases production costs but can be passed on to consumers, used to internalize externalities.
It shifts the MPC curve to left to make it perfectly aligned with msc
Solves overconsumption and production
Free Rider Problem
Occurs when individuals benefit from a good without paying for it, leading to under-provision of the good.
Income Inequality
The unequal distribution of income, contributing to market failures.
Regulatory Capture
A situation where regulatory agencies are influenced by the industries they regulate, potentially leading to market failure.
Tragedy of the Commons
A situation in which shared resources are overused and depleted due to individual self-interest.
Regulation to solve market failure
Rules/Law enacted by the government that must be followed by economic agents
It uses the command / control approach.
Why it works?
Incentive to change behaviour, solves issues in free market and allocative efficient and welfare gain.
However it is expensive, problem with setting right regulation, black markets
What to say about negative externalities
Ignoring social cost/benefit because of their self interest leads to over production/consumption
Price is to low, only accounting for the private cost and not the full social cost.
Misallocation of resources, allocative inefficiently
What to say about positive externalities?
Self interest, Underconsumption, misallocation of resources, allocative inefficiency
Ne externalisties consumption
MSB < MPB
MSC = MPC
Ne externalities in production
MSC > MPC
MSB = MPB
P externalities in consumption
MSB > MPB
MSC = MPB
P externalities in production
MPC > MSC
MPB = MSB
