1.3 Market Failure Flashcards
(26 cards)
what is marginal cost
the extra cost of producing one extra unit
what is marginal benefit
the extra benefit of consuming one extra unit
what are private costs
a producer’s costs of production
what are social costs
private costs + external costs (impacts on third parties)
what are private benefits
individual benefit to the consumer upon consumption
what are social benefits
private benefits + external benefits
which three things need to happen to achieve allocative efficiency
maximisation of society surplus (CS + PS) where D = S
maximisation of net social benefit where MSB = MSC
resources perfectly follow consumer demand where D = S
what assumptions are made when discussing an allocatively efficient free markets
many buyers/sellers in the market
perfect information for consumers and producers
no barriers to entry (or exit) for firms
firms aim to maximise profit
consumers aim to maximise utility
what are the three types of market failure
positive/negative externalities
under-consumption of public goods
information gaps distorting market outcomes
what are negative externalities in production
costs to 3rd parties as a a result of the actions of producers
what are the main examples of negative production externalities
air pollution
resource depletion
resource degradation
deforestation
when does a negative production externality occur
where MSC > MPC
how to find net welfare loss of a negative production externality on a diagram
the triangle that points to the AE equilibrium
(private equilibrium, point vertically upwards from private equilibrium on MSC curve, social equilibrium)
what is the analysis of negative production externalities
firms act in their self interest
over-production/consumption
price set is too low
misallocation of resources beyond a certain point
what is a negative externality of consumption
costs to 3rd parties as a result of the actions of consumers
what are the main examples of negative consumption externalities
smoking, excessive alcohol use, excessive unhealthy foods etc.
when does a negative consumption externality occur
where MSB < MPB
what is the analysis of negative consumption externalities
consumers act in their self interest
over-consumption/production
misallocation of resources
what is a positive externality of consumption
benefits to 3rd parties as a result of the actions of consumers
what are the main examples of positive consumption externalities
healthcare (vaccines)
education
exercise
healthy eating
when does a positive consumption externality occur
where MSB > MPB
what is the analysis of positive consumption externalities
consumers act in their self interest
under-consumption/production
misallocation of resources
what is a positive externality of production
benefits to 3rd parties as a result of the actions of producers
what are the main examples of positive production externalities
in-work training
research & development
