2.8.2 Market Failure 2

Negative Externalities of Consumption
> Will often lead to __ benefit < __ benefit
e.g. air pollution from c__
A__, drink driving
__ congestion

social, private, cars, alcohol, traffic

Negative Externalities of Production
> __ Costs > __ Costs
e.g. a__ pollution from factories
n__ pollution from planes
industrial w__

social, private, air, noise, waste

What is a private cost?

actual cost

Define Private Costs of Production.

actual costs to a firm/govt to produce a good/service

Define Private Costs of Consumption

actual costs a consumer pays to consume a product

Define External Costs of Production

-ve side effects involved with production

Define External Costs of Consumption

-ve side effects involved with consumption

Social cost formula

private costs + external costs

Example of social cost
Driving a car: driver pays p__ costs of buying the car, petrol etc

BUT they don’t pay for e__ costs e.g. air pollution, traffic (inconveniences others)

∴ driver doesn’t pay the f__ costs to society (social cost)

∴ example of market failure

private, external, full

Define private benefits.

Actual benefits of production/consumption of good or service enjoyed by a firm, individual or govt

Social benefits formula

Private benefits + external benefits

Example of social benefits
Merit good: e__

Student gains p__ benefit of gaining better knowledge

Society gains e__ benefit of an educated population

education, private, external

Govt Intervention in Market Failure
TAXES
__ consumption/production of d__ goods (demand & supply)

Minimises -ve e__ from demerit goods e.g. lung cancer from cigarettes

Producer pays __ tax = ↑cost of production = ←__ curve = ↓supply

= ↑equilibrium price = ↓Q_

limits, demerit, externalities, indirect, supply, d

Govt Intervention in Market Failure
Do Taxes Work?
YES: d__/supply of cigarettes has __ , and the t__ can be used elsewhere
BUT
Demand for cigs is price __
So ↑price = small ↓in c__ AND indirect taxes are regressive

demand, fallen, tax, inelastic, consumption

Define regressive

punishes poor more than rich

Govt Intervention in Market Failure
RULES AND REGULATIONS
will __ (inc/dec) demand (less people willing & a__ to buy at every price)
So both Qd & __ will decrease

decrease, able, Qs

Govt Intervention in Market Failure
Do Rules Work?
YES, ↓consumption of __ goods & ↑consumption of m__ goods

§  ↑A__ of __ve impacts of demerit goods

§  Societal norms gradually c__ (e.g. attitude to smoking)

↑Awareness of +ve impacts of __ goods

demerit, merit, awareness, -, change, merit

Govt Intervention in Market Failure
Do Rules Work?
BUT, __ markets can develop,
People can __ rules,
E__ rules can take lots of t__ & $$

black, break, enforcing

Govt Intervention in Market Failure
EDUCATION & ADVERTS
e.g. campaigns to limit alcohol intake

§  Encourages h__ lifestyle (less drinking)

§  = ↓__ve externalities e.g. car accidents (from drink-driving)

= ↑__ve externalities e.g. more healthy people contributing to the economy

healthy, -, +

Govt Intervention in Market Failure
Does Education & Adverts Work?
§  There’s o__ c__ ($$ could’ve been spent on more productive stuff)

Advertising can be i__

opportunity cost, ignored

Govt Intervention in Market Failure
SUBSIDIES
e.g. encouraging consumption of public transport = ↓traffic

>> >> >> ↓external __ of car driving & ↑external __ of public transport

BUT

There’s o__ c__ (firms are __ (more/less) efficient as they rely on the s__ instead of finding ways to r__ costs/improve service

costs, benefits, opportunity cost, less, subsidy, reduce

Govt Intervention in Market Failure
PRODUCING GOODS THEMSELVES
> They do it if there’s strong __ve externalities e.g. schools, libraries, parks, roads

> if they didn’t, many of these goods would be u__-__

BUT

>Free r__ (ppl who enjoy these without contributing via t__) exist

>> Can lead to excess __ = shortage

+, under-consumed, riders, taxes, demand