1.3 market failure Flashcards
market failure def
when the price mechanism fails to allocate resources efficiently leading to a deadweight loss
what does deadweight loss mean
loss of efficiency for society as a whole - something can be corrected and make some people better off without making others worse
government intervention def
the government taking aciton to remedy allocatively inefficient markets
complete market failure
when there is no market whatsoever ‘missing market’
partial market failure
when there is a market but there is misallocation of resourcs
externalities def
costs/benefits on a third party created by economic agents when undertaking activities
types of market failure:
externalities, monopoly, oligopoly, monopsony, tragedy of the commons, unemployment, poverty, inequality, public goods, demerit goods
what is tragedy of the commons
overuse / destruction of finite but valuable good poeple have unlimitedc access to
public good def
a good that is non rivalrous (consumption does not reduce availability) and non excludable (impossible tos top people from using it)
examples of public goods
the army, street lights, public parks (could have tragedy of the commons)
positive externality
social benefit not included in cost
social costs < private costs
negative externality
cost to society not in the cost paid for
social costs > private costs
private costs
cost of prod/cons goods paid for by third partiess
social costs
cost of prod/cons goods paid for by society
marginal analysis
cost/benefit when an additional unit is consumed or produced
marginal private benefit
satisfaction for consumer from each additional unit
depicted by demand curve - shows diminishing marginal utility
where is allocative efficiency?
there is allocative efficiency at p=mc because it is the quantity and price of product maximising consumer and producer surplus
marginal private cost
the cost of producing one extra unit to the producer - shownn by the supply curve
at higher prices - FC spread over mroe quantity, and more motivation to produce more
marginal social costs
cost of consuming/producing additional good paid for by society
MSC = MPC + MEC (marginal external costs - the negative externality)
marginal social benefits
benefits of consuming/produing unit of additional product on society
MSB = MPB + MEB (marignal external benefit - positive externality)
negative production externalities diagram
demand curve - MSB = MPB
2 supply curves - MPC shifted out, MSC shifted in
trianfle pointing to social optimum equlilbrium - shows the deadweight loss to society
consequences: need to raise prices and reduce output
overproduction shown by the dist between q1 anf q2
distance of cost curves = external cost = the negative externalitt
positive consumption externalities diagram
supply = msc = mpc
MSB shifted out, MPB shifted in
social optimum triange pointing to is = deadweight loss of welfare if there is underconsumption
underconsumption = shown by the dist between q1 and q2
distance between benefit curves vertically = external benefit
negative production externalities example
- NPK fertilisers causing algal blooms when in water
- air pollution from factoroes or plants = Drax power station largest polluter in UK = 20.5 mil tonnes of CO2 / year
positive prodyction externalities
- research and development = medicine - finding Pfeiser and Astrazeneca vaccine for covid
- free online software - openAI and google
negative consumption externalities
- air pollution and lung damage from smokers - 2007 smoking act which banned it in indoor public places, 2024 ban for people born after 2008 to purchase cigarettes
- consumption fo fast food and obesity - burden on healthcare system NHS
positive consumption externalities
- free school meals - better national health levels and less burden - in Covid continued by Marcus Rashford
- subsidised cycling schemes in cities such as the santander bikes (boris) in London and citibikes in NYC
