Market Failure Flashcards
(26 cards)
Overproducing and oerconsunsiming means
Welfare loss as socialmcost is greater than social benefit
Marginal Social Benefit
Private Benefit + External Benefit
Marginal social cost
Private Cost +e external cost
Define Market Failure
Market Failure-Price mechanism fails to allocate resources efficiently(misallocation of resources)- not best for society
Negative Externalities in Production
As a result resources allocated at private equilibrium of pq and q1 in market and instead of social optimum . This causes an overproudction in the market as q1 is greater than q. Furthermore the price is too low at p1 rather than p star no relecting the full social cost of production Threby there is a misallocation of resources where to many resources allocated to this market than is social desirable> Thereby leading to a welfare lost as there is more cost than benefits with units beyond q
Define Negative Externalities in Production
- n is when production of a good causes cost that affect third parties outside a price mechanismFor instance A result of clothing factories dump waste into nearby lakes local resident who use river fo bathing or drinking purposes suffer life threating desi
Negative Externalities in Consumption
In a FM consumers only consider private benefits in consumptiona nd ignore social beenfit of actions due to self interest.
As a result resources are allocated at the prviate quilibrium of p1 and q1 in the market instead of social optimum.
Overconsumption in the market as q1 is greater than q*
Misallocation of resources where too amny resources allocated to market than is socially desiarable.
This generates a welfare loss with society bearing more cost than benefits when beyond Q*
Negative Externalities in COnsumption Definition
Cost to third parties as a result of the actions of consumers
Second hand smokers-chance of respitory problems
becoming obese creates strain on healthcare services
Causing an external cost on tax payers who must pay to fund these costs
Positive Externalities in Consumption
In a Free market indivudal consumers only consider rpviate benefits in consumption they ignore the full social benefit of actions due to self inteerest. As a results resources are allocatewd at private equliibrum instead of social optimum..There is an underconsumption in market as q1 is less than q* The end result is a misallocation if resources as theure us less few resources allocated to the market than is socially desirable.This generartes a welfare loss with society lsoing out that would have generated more benefit to society than cost
Define Positive externalities in Consumption
Benefits to third parties as a result of the actions of consumer.For instance the beneffits to producers and the economy of having indviduals consuming healthy food.
Positive Externalities in Production
benefits to third parties as a result of the actions of producers.
In a fm individual producers only consider their private costs of production.They ignore full social cost of thier actions due to self interest.Resources are allocated at private equillibrium of p1 and q1 rather than socially optimim.Trthere is an uderoiduction as q1 is greater than q star.THe misalllocation of resource menas they are too feew goods allocated to the market than its socialy desirable.This generates a welfare loss with scoiety losing out producing beyond q1 up to a* that would have genrated more society than cost
Demerit goods
harmful to individual consumers than they reakuse
they overocnsume and overpride by fmd ue to imperfect info.
Examples include fast food
in a free market individual consumer only consider pb in consmpiton and ignore full social benefit of their actions due to self itnerest and lack adequate info to understand tru eprivat and social benefit
asa r esult resources allocated at private equilibrium insstead of social optimum.there is an overconsumption as q1 is greater than q star with consumer making irration desitions. leads to misallocation in resources where too many resourcces allocated in maket than its soically desirable this generates a welfare loss.
indirect tax to solve negative externality in production
an indirect tax will increase cop for polluting firms
shift mpc curve to mpc +tax now equal to msc
price increase in the makret with quantity reducing
the externalityity will be fully internalised with price rflecting full social cost
hence the pollutor is now paying full cost of actions
over pro and over consumption is solved with resources allocated efficiently at q star no longer a misallocation of resources
welfare maximised
benefits of indirect tax on gov revenue
can be used to further solve the existing market failure for instance subsiidising better alternatives funding advertising campagins.
eval of indirec tax
over consumption will remain as the demand may be innalistic this is because they may be necessities or additiives and lesss goood substitues available
knowing the correct level of taxation to set is extreemly difficult
unitneded consequences
subsidies to solve positive externaltiies
subsidies will reduce to cost of production for firms shift mpc curve rightwars to mpc +sub the price decrease in market consumption is encoruaged with increasing quantity at social optimum level. under consumption fully solved no longer a misallocation of resoruces
welfare is maixmised
eval for subsidies
expensive to implemnt
if dmenad inelastic may reduce pirce rather than increase quantitity.l
how does welfare loss be made through demerit goods
It generates a welvare loss with society bearing more cost than benefit when units beyong q* are produced
how is welfare loss made through merit goods
it generates welfare loss as we lose out on units beyond q* up to q1 that would have benefitted society
Negative Advertising solving market failure
Imperfect info is rout cause of problems
-individuals are informed when making decisions about smoking
consume less as they fully understand how bad the product is
causing MPB to shift leftwards which is equal to MSC
thereby operating at socially optimum level
leads to an increase in welfare
positive advertising/information provision to solve merit good market failure
imperfect info is the root cause of problem
individual consumers whoa re now well informed
will consumer more
shift mpb to right wehre equls to msb
this market operate at socially optimum at Q*.
Welfare has increased and will remain at equillibrium
evaluation for adveritising info provision
very costly
no guarantee that advertising or info provision will work.
advertising will not change behaviour immediately
minimum price to solve de-merit good and price volatility
minimum prices are price floors set above the quilibrium price in the market to discourage consumption if demerit goods such as alcohol
p1 to pm to internalise the negaative externality and discourage consumption solving over consumption issues and bringing markets ti allocative effficient production level erading misallocation of resources.
evaluation for minimum price
demand for alocohol is price inelastic.Due to it beign an additive. As price increase qunaitity will decreate proportionally less. Not help reduce quantitiy by enough to fully sove the mrket,
firms may shut down or elave country causing unemployment.
lead to a blakc market which worsens the extent of negative externalities generated oonce more government has created a new market failure which needs spending to police
