Unit 2.8: Market Failure Diagrams Flashcards
Using an externalities diagram, explain positive consumption externalities on the vaccine market [4]
(31)
- Positive externalities of consumption occur
when MSB > MDB, where MSB = MPB + MEB
- Market equilibrium (A)occurs where MPC = MPB
- Socially optimal equilibrium (B)is MSB = MSC
- Since MPB < MSB, the market equilibrium quantity is less than the socially optimal quantity, Qe Q*
- under allocation of resources (Q* - Qe) resulting in welfare loss and market failure
Using an externalities diagram, explain the positive production externalities on the Hong Kong airport runway production [4]
(32)
- Positive externalities of production occur when marginal social cost (MSC) of production is lower than the marginal private cost (MPC), ie. MSC < MPC
- Market equilibrium (A)occurs where MPC = MPB
- The socially optimal output (B)is where MSB = MSC
- Since MPC > MSC, the market equilibrium quantity is less than the socially optimal quantity, Qe<Q*
- Under-allocation of resources resulting in dead weight loss and market failure
Using an externalities diagram, explain how the legislation requiring all citizens to wear face masks in public areas affects the market for face masks [4]
(38)
- Point A = original market equilibrium
- Point B = socially optimal equilibrium
- Government legislation requires all citizens to wear face-masks in public areas.
- MPB curve shifts towards MSB curve.
- Market output Qe increases towards socially-optimal output Q*.
- MEB and welfare loss decrease or are eliminated.
Using an externalities diagram, explain how greater public education affects the market for vaccines [4]
(41)
- Point A = original market equilibrium
- Point B = socially optimal equilibrium
- Public education creates awareness upon the importance of vaccinations.
- MPB curve shifts towards MSB curve.
- Market output Qe increases towards socially-optimal output Q*.
- MEB and welfare loss decrease or are eliminated.
Using an externalities diagram, explain how direct provision affects the consumption for vaccines [4]
(45)
- Point A = original market equilibrium
- Point B = socially optimal equilibrium
- Direct provision by the government shifts the supply curve outwards to S2
- Market output Qe increases to socially optimal output Q*
- Point C = new market equilibrium
- MEB and welfare loss are eliminated
Using an externalities diagram, explain how direct provision affects the production of smart watches [4]
(46)
- Point A = market equilibrium
- Point B = socially optimal equilibrium
- Supply increases, shifting the MPC curve to the MSC curve.
- Market output Qe increases to socially optimal output Q*
- MEB and welfare loss are eliminated, and allocative efficiency is achieved.
Using an externalities diagram, explain how subsidies affect the consumption for face masks [4]
(50)
- Point A = market equilibrium
- Point B = socially optimal equilibrium
- Subsidies cause the supply curve to shifts outwards to S2
- Subsidy per unit should equal MEB
- Point C = new market equilibrium
- Output level increases to Q*
- Market price reduces to Pā
- Welfare loss is eliminated
Using an externalities diagram, explain how subsidies affect the production of smart watches [4]
(51)
- Point A = market equilibrium
- Point B = socially optimal equilibrium
- MPC curve shifts downwards to the MSC curve by the amount of subsidy
- Output increases to Q*
- Market price reduces to P*
- Welfare loss is eliminated.
Using an externalities diagram, explain negative consumption externalities on the alcohol market [4]
(58)
- Negative externalities of consumption occur when MPB > MSB, where MPB = MSB + MEC.
- Market equilibrium (A) occurs where MPC = MPB
Socially optimal equilibrium (B) is where MSB = MSC. - Since MPB > MSB, the market equilibrium quantity is larger than the socially optimal quantity, Qe > Q*.
- Over-allocation of resources resulting in welfare loss and market failure.
Using an externalities diagram, explain negative production externalities on the meat market [4]
(63)
- Negative externalities of production occur when MSC > MPC, where MSC = MPC + MEC.
- Market equilibrium (A) occurs where MPC = MPB.
- Socially optimal equilibrium (B) is where MSB = MSC.
- Since MSC > MPC, the market equilibrium quantity is larger than the socially optimal quantity, Qe > Q*.
- Over-allocation of resources resulting in dead weight loss and market failure.
Using an externalities diagram, explain how indirect taxes affect the alcohol market [4]
(69)
- Point A = market equilibrium
- Point B = socially optimal equilibrium
- The MPC curve shifts upwards by the amount of tax, which equals to MEC
- Point C = new market equilibrium
- Quantity reduces to socially-optimum level Q*
- Market price increases to Pā
- Welfare loss is eliminated
Using an externalities diagram, explain how an imposition of a minimuum drinking age affects the consumption of alcohol [4]
(73)
- Point A = market equilibrium
- Point B = socially optimal equilibrium
- A minimum drinking age reduces the number of alcohol consumers
- MPB curve shifts towards MSB
- Market quantity reduces to the socially-optimum output (Q*)
- Welfare loss is eliminated
Using an externalities diagram, explain how the government requiring firms to use emission reducing technology affects the production in the electricity market [4]
(74)
- Point A = market equilibrium
- Point B = socially optimal equilibrium
- Government requires firms to use emission-reducing technologies to produce electricity
- MPC of producers increases to MPC2
- Point C = new market equilibrium
- Output reduces from Q1 to Q2 and price increases from P1 to P2
- Overproduction and MEC is reduced
Using an externalities diagram, explain how greater education and awareness affects the cigarette market [4]
- Point A = market equilibrium.
- Point B = socially optimal equilibrium.
- Through education, the negative effects of cigarettes are introduced to the public.
- MPB (demand) curve shifts towards MSB.
- Market quantity reduces to the socially-optimum output (Q*).
- The welfare loss is eliminated.
Using an externalities diagram, explain (and identify tax revenue) how the imposition of carbon taxes on the electricity affects the electricity market [4]
- Point A = market equilibrium
- Point B = socially optimal equilibrium
- Carbon tax increases the production cost for electricity firms
- MPC curve shifts upwards to MSC curve, as producers pay for carbon emissions
- Market quantity reduces to optimal quantity Q*
- Market price increases to P*
- Producers receive the price Pā
- The welfare loss is eliminated
- Tax revenue is generated
