Market Failure

Demerit Goods

Demerit Goods

Products that create negative spillover effects to third parties not directly involved in an economic transaction.

Marginal Private Benefit

The additional value enjoyed by households and firms from consumption or production of an extra unit of a particular good

Marginal Private Cost

The additional expense of production for firms or the extra charge paid by consumers for the output or consumption of an extra unit of a good or service

Marginal Social Benefit

The total gains to society from an extra unit of production or consumption of a particular good or service. It is the sum of the benefits for private individuals and the positive externalities to others in society

Marginal Social Cost

The Total Expenses to society from an extra unit of production or consumption of a particular product. The total costs of producing or consuming an additional unit of output includes both private or direct costs of producers and consumer plus the costs to others in society

Market Failure

Whenever the free market equilibrium quantity of output is greater or less than the socially optimal level of output. The free market produces too much or too little. Leading to welfare loss

Merit Goods

Products that create positive externalities when they are produced or consumed

Negative Externalities

When the private benefit to consumers of a product are greater than the social benefits of its consumption. There are spillover costs resulting from the consumption of the product born by society as a whole.

The expenses incurred by third parties in an economic transaction for which no compensation is paid.

Negative externalities of Consumption

When the consumption of a good creates spillover costs on third parties.

Positive Externalities

The benefits enjoyed by third parties not directly involved in an economic transaction.

Socially optimal level of output

The output level that reflects all the costs and benefits associated with a transaction.The equilibrium that would be achieved if the market outcome reflects the effect of externalities