Market failure

Public goods are collective consumption goods that are non-rivalous and non-excludable.

non-rivalous one person’s consumptiom does not reduce the amount avaliable for others.

non-excludable people who do not pay for these can also benefit from it.

Merit goods are products that create positive extrenalities, when they are produced or consumed MSB>MPB (they are rivalous and excludable) like vaccines, recycling programmes, education, healthcare

Demerit goods products that create the negative externalities to society. Their production and consumption results in MSC>MPC likw air pollution, junk food, alcohol and cigarettes

Positive extrenalities are benefits enjoyed by a third party not directly involved in the economic transaction.

Negative externalities/extrenal costs are expanses incurred by third parties which are not involved in economic transaction.

Deadweight loss/ welfare loss refers to reduction in social surplus due to inefficient allocation of resources.

Market failure situation when price mechanism allocates scare resources inefficient.

• private benefits the gain from production or consumption enjoyed by private firms
• private costs expanses incurred by an individual firm or person (of driving include purchase of car, fuel parking fees)
• social benefits total benefits of consumption or production to society, there is a sum of private and external benefits.
• social costs total costs from production and consumption to society, the sum of private and external costs.

The social optimum output occurs when MSB=MSC

• marginal private benefits additional value enjoyed by households and firms from consumption or production of an extra unit of a particular good or service
• marginal private costs additional expanse of production for firms or an extra charge paid by consumers for an extra unit of goods and services
• marginal social benefits total gains to sociaty from an extra unit of production or consumption of particular good or service. Sum of private benefits of individuals and positive externalities.
• marginal social cost total expanses to society from an extra unit of production or consumption of particulat product. Total costs from this additional unit of output includes private costs of consumers or producers and costs to others in society.

Allocative efficiency is achieved when social or community surplus is maximised, where MSB=MSC.

Social surplus/community surplus is the sum of consumer and producer surplus at given market price (eqilibrium). The net benefit avaliable to society from an economic transaction or activity.

Welfare loss in positive externalities means under-consumption of merit good and it is a triangle on the left side of the diagram.

In negative extrenalities there in over-consumption of demerit goods and it is a right triangle.

Indirect tax in a leavy of a fixed amount of percentage on particular goods and services, not on the income.

Example excise tax on cigarettes from 2022 to 2023 increase by 10% and on alcohol by 5%.

Black market will gain from this. Camele 16.50 - 2022 / 16.99 w 2023. In Poland this is associated also with progressive inflation that is shyrocketing from year 2020/2021

Alcohol and cigarettes are inelastic good because they have not any substitutes. Consumers do not have a great choice so they are more willing to pay higher price for a package. Also this demerit goods are very addictive, so consumers buy this on a daily basis as their habit.

Goverment revenue will increase because taxes are a big part of ther revenue. Increase on leavy on demerit good increase the revenue.

Consumers are worst off because they need to pay higher prices for their favourite cigarettes. Also they produce negative externality.

Producers are worst off because they need to supply at higher prices so the price for it increase. They also pay tax for producing of these goods, and they do not want to pay that high price for production.

Workes are worst of because the price of production increase and they bosses will have less money for their salary so they are more likely to be fired.

Short term - consumers need to pay higher prices, goverment revenue increase, decrease in production

Long term - govermennt could spend this money to provide some public goods, prodduction and consumption of cigarettes produce more air pollution, however if prices will progressively increase less people could afford a package of cigarettes so they consumption will decrease.

Subsidy is a goverment regulation that aims to increased output by increased production by reducing its cost. Goverment will support the local prducers and make a financial assistance in order to increased the additional unit of output. That make also an oppurtinity costs. These money could be implemented to healthcare or education. This funds cannot be used to provide a public goods.

Overall subsidies in the price celling (maximum price above equilibrium) make an leftwear shift of the supply curve making production more affordable, even when the price for consumers decrease.

[[Then society as a whole is worse off with the subsidy because there is an over-allocation of resources to the production of the subsidised good.[[