Knowt
Ch 9 - Market Failure
* **Market failure** occurs when resources aren’t allocated in an optimal manner, meaning
that the market isn’t allocatively efficient, and community surplus isn’t maximized.
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1. Signs of market failure:
1. Shortage
2. Surplus
3. High prices
4. Bad quality
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* Types of goods:
1. **Demerit goods** are goods or services considered to be harmful to people who consume
them and to society as a whole, that would be over-provided by the free market and so
over-consumed.
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2. **Merit goods** are goods or services considered to be beneficial for people who use them
and society as a whole, that would be under-provided by the free market and so under-
consumed.
* Tradable permits is a market-based solution to negative externalities of production. They
are permits to pollute, issued by government, which sets a maximum amount of pollution
allowable. Firms may trade these permits for money.
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3. **Public goods** are goods or services which would be under-provided or not provided at all
by the free market. They are non-excludable and non-rivalrous, making it pointless for
private individuals to provide the good themselves.
* Sustainability/Sustainable development is where consumption needs of the present
generation are met without reducing the ability to meet the needs of future generations
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* Private cost: cost on you, as a consumer
* Private benefit: benefit for you, as a consumer
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* External cost: cost on other people because of you
* External benefit: other people’s benefit because of you
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* Social cost: private and external cost
* Social benefit: private and external benefit
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* **Marginal social cost (MSC)**: total cost society pays for the production of another unit of taking further action in the economy
* Total cost is calculated as:
* MPC = marginal private cost
* MEC = marginal external cost (+ive,-ive)
* **Marginal social benefit (MSB)**: individuals social benefit, plus overall benefit to society from one additional unit of production
* Includes positive and negative externalities that impact individual societies
* MSB = MPB + external benefit
* **Externalities**: when a production or consumption of a good has an effect on third party occurrence
* Actions that have a -ive or +ive effect on others
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* **Negative Externalities**: are the ‘bad’ effects that are suffered by the third party, for which
the third party doesn’t get compensated, when a good or service is produced or
consumed
1. Negative externalities of production and consumption
2. MSC>MPC
3. MSC = MPC + MEC
* negative externalities of consumption: occur when the consumption of a good or service creates the external costs that is damaging to third parties (MSB
that the market isn’t allocatively efficient, and community surplus isn’t maximized.
\
1. Signs of market failure:
1. Shortage
2. Surplus
3. High prices
4. Bad quality
\
* Types of goods:
1. **Demerit goods** are goods or services considered to be harmful to people who consume
them and to society as a whole, that would be over-provided by the free market and so
over-consumed.
\
2. **Merit goods** are goods or services considered to be beneficial for people who use them
and society as a whole, that would be under-provided by the free market and so under-
consumed.
* Tradable permits is a market-based solution to negative externalities of production. They
are permits to pollute, issued by government, which sets a maximum amount of pollution
allowable. Firms may trade these permits for money.
\
3. **Public goods** are goods or services which would be under-provided or not provided at all
by the free market. They are non-excludable and non-rivalrous, making it pointless for
private individuals to provide the good themselves.
* Sustainability/Sustainable development is where consumption needs of the present
generation are met without reducing the ability to meet the needs of future generations
\
* Private cost: cost on you, as a consumer
* Private benefit: benefit for you, as a consumer
\
* External cost: cost on other people because of you
* External benefit: other people’s benefit because of you
\
* Social cost: private and external cost
* Social benefit: private and external benefit
\
* **Marginal social cost (MSC)**: total cost society pays for the production of another unit of taking further action in the economy
* Total cost is calculated as:
* MPC = marginal private cost
* MEC = marginal external cost (+ive,-ive)
* **Marginal social benefit (MSB)**: individuals social benefit, plus overall benefit to society from one additional unit of production
* Includes positive and negative externalities that impact individual societies
* MSB = MPB + external benefit
* **Externalities**: when a production or consumption of a good has an effect on third party occurrence
* Actions that have a -ive or +ive effect on others
\
* **Negative Externalities**: are the ‘bad’ effects that are suffered by the third party, for which
the third party doesn’t get compensated, when a good or service is produced or
consumed
1. Negative externalities of production and consumption
2. MSC>MPC
3. MSC = MPC + MEC
* negative externalities of consumption: occur when the consumption of a good or service creates the external costs that is damaging to third parties (MSB
