Market Failure Notes

Market Failure

  • Occurs when unregulated markets fail to allocate resources efficiently.
  • Perfect competition markets lead to efficient outcomes when there are no external costs or benefits.
  • Total surplus is maximized (CS+PS).

Externalities

  • Externalities are external costs or benefits that markets do not take into account.
  • Negative externalities (External costs) e.g., Pollution:
    • Social Cost = Private Cost + Marginal External Cost
  • Positive Externalities (External benefits) e.g., Vaccines:
    • Social Benefit = Private Benefit + Marginal External Benefit

Internalizing Externalities

  • External Costs:
    • Taxes, fines, fees
    • Regulations
  • External Benefits:
    • Subsidies
    • Regulations

Sources of Market Failure

  1. Externalities
  2. Imperfect Competition: Monopolies (firms possess "Market power," the ability to influence price)
  3. Public goods + Common Resources

Firm Conditions

  • Short Run: Ave < ATC
  • "Breaking even": TR=TC or MC= ATC
  • TR=PxQ
  • TC= ATC x Q