2.4 - market failure, MPB, MSB, MPC, MSC, externalities,

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17 Terms

1
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market failure

less than optimal allocation of resources, goods and services

2
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types of market failures

  • public goods

  • common pool resources

  • negative externalities of consumption

  • negative externalities of production

  • positive externalities of consumption

  • positive externalities of production

3
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marginal private benefit MPB

the additional benefit received by consumers from consuming one more unit of a good or service.

4
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marginal private cost MPC

the additional cost incurred by producers for producing one more unit of a good or service.

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marginal social benefit MSB

the total benefit to society from the consumption of one more unit of a good or service.

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marginal social cost MSC

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

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socially optimum output

MSB = MSC

  • level of output desired without market failure

<p>MSB = MSC</p><ul><li><p>level of output desired without market failure</p></li></ul><p></p>
8
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negative externalities of production

  • failing due to over-provision

  • producers only consider private and not external costs

    • air pollution, water contamination, health problem

<ul><li><p>failing due to <strong><em>over-provision</em></strong></p></li><li><p>producers only consider private and not external costs</p><ul><li><p>air pollution, water contamination, health problem</p></li></ul></li></ul><p></p>
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ways of correcting negative externality of production

  • taxation

  • regulation and legislation

  • subsidies

  • tradable permits

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negative externalities of consumption

  • caused during consumption of demerit goods

  • failing due to over-consumption

  • consumers consider only private costs and not external

    • waste

<ul><li><p>caused during consumption of <strong>demerit goods</strong></p></li><li><p>failing due to <u>over-consumption</u></p></li><li><p>consumers consider only private costs and not external</p><ul><li><p>waste</p></li></ul></li></ul><p></p>
11
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ways of correcting negative externalities of consumption

  • education

  • taxation

  • regulation

  • improve consumer behavior

    • campaigns

    • ads

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demerit goods

Goods that are considered harmful to individuals and society

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merit goods

goods that are deemed beneficial for individuals and society

  • under-consumed

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positive externalities of production

  • market is failing due to under-provision

  • only private benefits are considered by producers and not external

<ul><li><p>market is failing due to <u>under-provision</u></p></li></ul><ul><li><p>only private benefits are considered by producers and not external</p></li></ul><p></p>
15
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ways of correcting positive externalities of production

  • subsidies

  • regulations

  • direct government provision

  • price floor

16
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positive externalities of consumption

  • created during consumption of merit goods

  • failing due to under-consumption

  • customers only consider private benefit and not external

<ul><li><p>created during consumption of <strong>merit goods</strong></p></li><li><p>failing due to <u>under-consumption</u></p></li><li><p>customers only consider private benefit and not external</p></li></ul><p></p>
17
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ways of correcting positive externalities of consumption

  • subsidies to consumers

  • public awareness campaigns

  • government provision of merit goods

  • consumer nudges