market failure + externalities

When does market failure occur

When a free market fails to allocate resources efficiently resulting in a loss of economic and social welfare

Allocative efficiency

Consumer satisfaction is maximised

Productive Efficiency

Where production takes place using minimal resources

Economic efficiency

When both allocative and productive efficiency is achieved

Information failure

A lack of information resulting in the consumer or producer making decisions that don’t maximise welfare

4 main examples of information failure

Misunderstanding of true cost, addiction, uncertainty and complex information

Asymmetric information

Occurs when somebody knows more than another in a market snd information isn’t shared equally

Externality

An effect whereby those not directly involved in the decision making are affected by the actions of others

Private cost

The costs incurred by those doing a particular action

Private benefit

The benefits directly to those doing a particular action

External cost

The costs that are the consequence of externalities to third parties

External benefits

The benefits that accrue as a result of externalities to third parties

Positive externality

Social benefits exceed private benefits

Negative externality

Private benefits exceed social benefits

Marginal private benefit (MPB)

The additional satisfaction or utility that a person receives from consuming an additional unit of a good or service

Marginal Private Cost (MPC)

The cost added by producing one extra item of a product

Marginal social benefit (MSB)

The total benefit to society from one extra unit of a good consumed

Marginal social cost (MSC)

The total cost to society as a whole for producing one further unit this total cost of producing one extra unit must also include the cost to the external environment and other stakeholders

In a negative consumption externality graph does the MSB/MPB curve shift right or left

Right

In a negative production externality graph does the MSC/MPC curve shift right or left

Right

Which way does the point of the welfare loss triangle point if the externality graph is negative

Left

In a positive consumption externality graph does the MSB/MPB curve shift right or left

Left

In a positive production externality graph does the MSB/MPB curve shift right or left

Left

Which way does the welfare loss triangle point on a positive externality graph

Right

Inefficiency

When a free market mechanism fails to achieve economic efficiency

Merit goods

Positive goods or services the government believes will be underconsumed in a free market

Demerit goods

Negative goods or services the government believes will be over consumed in a free market

Public goods

Goods that are collectively consumed with non-rivalry and non-excludable characteristics

Non-excludability

You can’t stop people from using goods or services

Non-rivalry

One persons consumption doesn’t affect another’s same amount of goods are accessible