2.8 + 2.9 Market Failure Flashcards
What is a market failure?
A situation in which the allocation of goods and services is not efficient.
True or False: Externalities can lead to market failure.
True
Define externality.
A consequence of an economic activity that affects other parties who did not choose to be involved in that activity.
What are positive externalities?
Benefits experienced by third parties as a result of an economic transaction.
What are negative externalities?
Costs suffered by third parties as a result of an economic transaction.
Fill in the blank: An example of a negative externality is _____ pollution.
air
What is a common pool resource?
A resource that is available to all but is limited in supply, leading to potential overuse.
True or False: Common pool resources are non-excludable and rivalrous.
True
What is the tragedy of the commons?
A situation in which individuals acting in their own self-interest deplete a shared resource.
Which of the following is an example of a common pool resource? A) Public park B) Ocean fish stocks C) Public library D) National defense
B) Ocean fish stocks
What is the Coase theorem?
The proposition that if property rights are well-defined and transaction costs are low, parties can negotiate solutions to externalities.
Fill in the blank: Government intervention to correct externalities typically involves _____ or subsidies.
taxes
What is an example of a positive externality?
Education, as it benefits society beyond the individual receiving it.
True or False: The presence of externalities always leads to government intervention.
False
What is an external cost?
A cost incurred by a third party due to an economic transaction.
What is an external benefit?
A benefit received by a third party due to an economic transaction.
Fill in the blank: The market outcome is efficient when _____ are accounted for.
externalities
What is meant by ‘internalizing the externality’?
Incorporating external costs or benefits into the decision-making process of the parties involved.
True or False: All externalities can be easily quantified.
False
What role do taxes play in addressing negative externalities?
They increase the cost of the harmful activity, potentially reducing its occurrence.
What is a public good?
A good that is non-excludable and non-rivalrous, meaning individuals cannot be effectively excluded from use and one person’s use does not reduce availability to others.
Fill in the blank: Overfishing is a classic example of the _____ of the commons.
tragedy
What is a possible solution to the tragedy of the commons?
Implementing regulations or creating property rights to manage resource use.
True or False: Common pool resources can be managed sustainably.
True
What is an example of a policy to mitigate negative externalities?
Carbon taxes or cap-and-trade systems.
What is the significance of transaction costs in the Coase theorem?
High transaction costs can impede negotiations to resolve externalities.
Examples of market failure include:
When a production process causes pollution, such as in the air or water
When people consume goods that are harmful for them and the rest of society, such as cigarettes and illegal drugs
When the current generation exploits or depletes resources so that they won’t be available to future generations
In other words, when the marginal social benefit (MSB) equals the marginal social cost (MSC),
this is the socially optimal output.
situation where the market has achieved the optimal social welfare
externality
When these benefits or costs are passed on to those who are not involved in producing or consuming that particular good
how can externalities be created
can result either from the consumption or production of goods and services, and they create a gap or difference between the MPC and the MSC, or between the MPB and the MSB
In other words, an externality occurs when
free market leads to an outcome where MPB is equal to MPC but MSB is not equal to MSC and the outcome for the society is allocative inefficiency
Merit goods
private goods that will be under-produced by the market as consumers do not appreciate the benefits to themselves and society of their consumption
merit goods are _____ by the market. why?
under-provided
because firms are profit driven and will only produce goods and service
Demerit goods
are private goods that will be over-consumed and therefore over-provided by the market
why are demerit goods overconsumed and overprovided
consumers do not appreciate the costs to themselves and society of their consumption
negative externality of production
When the production process of a good or service generates a negative effect on a third party or on society as a whole
what is the situation in a negative externality? why?
the marginal social cost of production (MSC) is greater than the private cost of production (MPC)
as firms do not take these extra costs into consideration when deciding how much to supply at each price level.
benefits of carbon taxes
Carbon taxes on polluting firms are much easier to apply than other measures, such as tradable emission permits.
Tax revenues from carbon tax will be collected, and can be invested in promoting innovation and new technologies, such as renewable sources of producing energy.
problems with carbon taxing
It is often difficult to measure the pollution created and put a value on it to establish the amount of the tax.
It is also difficult to identify which firms are polluting and to what extent each firm is responsible for the pollution.
Taxes make firms pay for the pollution they create but do not actually stop the pollution from taking place.
problems with legislation
The ban or restriction may lead to unemployment in the corresponding industry, as jobs would be lost if firms are closed or the market reduced.
Banning a firm would create non-consumption of the good that was being produced, which might be a good necessary or desirable to consumers.
The cost of setting and then enforcing the policy standards may be very difficult to implement, and/or have a greater cost than the pollution itself.
beneftis of Tradable emission permits
It encourages firms to seek lower-cost methods of reducing emissions, such as better energy efficiency, which will lower their overall production costs.
It helps achieve the environmental objective of reduced emissions at lower costs.
The price of permits is determined by the free market, which allows greater flexibility to firms, because in a period of recession the price will fall due to falling output and in periods of economic boom the price will rise. This flexibility will allow firms to benefit from reducing emissions.
It provides a way for international cooperation to tackle the global challenge of emissions.
problems with Tradable emission permits
To start with, it is difficult to set an acceptable level of pollution.
It is also difficult to measure a firm’s pollution production in order to establish the amount of permits per firm.
Firms pay for the pollution they create but it does not lead to a reduction in pollution once the allowed limit has been set.
positive externality of production
when the production process of a good or service generates a positive effect on a third party or on society as a whole
when happens when positive externality of production
the marginal social cost of production (MSC) is smaller than the marginal private cost of production (MPC)
What is a positive externality of production?
When the production process of a good or service generates a positive effect on third parties or society as a whole.
Give examples of positive externalities of production.
Private firms investing in research and development.
Employee training provided by firms.
Bee-keeping benefiting agriculture through pollination.
Building flood defenses.
Why does positive externality of production lead to market failure?
The market under-allocates resources to the good because the marginal social cost (MSC) is lower than the marginal private cost (MPC), leading to less production than the socially optimal level (Q2 < Q*).
What does the demand curve represent in a market with a positive externality of production?
The demand curve represents both marginal private benefits (MPB) and marginal social benefits (MSB), meaning MPB = MSB.
What is the welfare loss due to positive externalities of production?
It is the potential welfare gain that society misses out on because production is below the socially optimal level (Q). Represented by the yellow triangle between Q2 and Q in a graph.
What are two government responses to positive externalities of production?
Subsidies to firms: Reduces firms’ production costs, increasing output closer to the socially optimal level.
Direct government provision: Government funds or directly provides goods/services with positive externalities.
what are the advantages of subsidies for addressing positive externalities of production?
Encourages firms to produce more goods with external benefits.
Reduces unrealized potential welfare gain.
What are the disadvantages of subsidies?
Difficulty in determining the appropriate level of subsidy.
Uses government funds, which have an opportunity cost (e.g., could be spent on healthcare).
What are the advantages of direct government provision?
Governments can ensure goods/services with positive externalities are available.
Reduces the externality by lowering firms’ production costs.
What are the disadvantages of direct government provision?
High cost for the government, creating opportunity costs.
Governments may lack the expertise of specialized firms.
May discourage private firms from investing in the same areas.
How does a subsidy affect the market for a good with positive externalities of production?
it shifts the supply curve from MPC to MPC + subsidy, reducing the externality and increasing production closer to Q*.
Why are resources under-allocated to goods with positive externalities of production?
Because the private cost of production (MPC) is higher than the total cost to society (MSC), leading to lower output than socially optimal.
What is the socially optimal level of production?
the point where marginal social cost (MSC) equals marginal social benefit (MSB), at Q*.
What is the relationship between MSC, MPC, and the externality in positive externalities of production?
MSC is smaller than MPC for every output level, and the vertical difference between MSC and MPC represents the externality.
diagram for negative consumption externality
What are externalities of consumption?
Externalities of consumption occur when the consumption of a good or service generates an effect (positive or negative) on third parties who are not part of the consumption decision
What are negative externalities of consumption?
Negative externalities of consumption happen when an individual’s consumption negatively affects third parties. Examples include second-hand smoke from cigarettes, air pollution from cars, and noise pollution from loud music.
What is the relationship between MSB and MPB in negative externalities of consumption?
In negative externalities of consumption, the marginal social benefit (MSB) is less than the marginal private benefit (MPB) because of the harm caused to third parties.
What is the socially optimal quantity of consumption for a good with negative externalities?
The socially optimal quantity (Q*) occurs where the marginal social cost (MSC) curve intersects the marginal social benefit (MSB) curve.
Why do negative externalities of consumption lead to market failure?
The market fails because the quantity consumed (Q1) is greater than the socially optimal quantity (Q), leading to overconsumption and inefficient resource allocation. The welfare loss is shown by a triangle between Q1 and Q.
What are the possible government responses to negative externalities of consumption?
Ban or regulate the good (e.g., restricting smoking areas or limiting car use).
Impose an indirect (Pigouvian) tax to increase the cost of consumption.
Fund negative advertising to reduce demand.
What are the challenges of banning or regulating a good?
Negative impact on industries, shareholders, and employment.
Reduced government tax revenue.
Perceived as restricting individual freedoms, leading to public dissatisfaction.
High enforcement costs.
What is a Pigouvian tax, and how does it work?
A Pigouvian tax is an indirect tax designed to internalize the external costs of a good. It shifts the supply curve upward, increasing price and reducing quantity consumed closer to the socially optimal level (Q*).
What are the problems with imposing taxes on goods with negative externalities?
Demand for addictive goods (e.g., cigarettes) is price inelastic, so consumption may not decrease significantly.
High taxes might encourage black markets.
Taxes make consumers pay for the external cost but do not eliminate the negative effect.
How does negative advertising help address negative externalities?
Negative advertising raises awareness of the risks associated with consuming harmful goods, reducing demand. This shifts the demand curve closer to the MSB curve, minimizing welfare loss.
What are the limitations of negative advertising?
High costs, creating an opportunity cost for the government.
Limited effectiveness in certain demographics (e.g., reducing teenage smoking).
Results may vary depending on the type of good and target audience.
How can you distinguish between negative externalities of production and consumption in a diagram?
Production externalities: MSC ≠ MPC (supply-side).
Consumption externalities: MSB ≠ MPB (demand-side)
What happens to welfare loss in negative externalities of consumption if no government action is taken?
The welfare loss remains as the quantity consumed exceeds the socially optimal level, with society bearing costs greater than the benefits from overconsumed units.
Why might governments prefer taxes or advertising over banning goods?
Taxes generate revenue that can mitigate the externality’s effects.
Advertising avoids directly restricting freedoms and can complement other measures.
Bans can provoke public backlash and disrupt industries.
positive externality of consumption graph
subsidy in positive externality of consumption graph
What is a positive externality of consumption?
It occurs when the consumption of a good or service generates a positive effect on a third party or society as a whole.
What are some examples of positive externalities of consumption?
Education and health care, such as vaccines, which prevent illness for the individual and reduce the spread of diseases.
What happens to the marginal social benefit (MSB) compared to the marginal private benefit (MPB) in positive externalities?
MSB is greater than MPB because the positive effects on society are not reflected in private demand.
Why do positive externalities of consumption lead to market failure?
The market allocates fewer resources to these goods than is optimal for society, resulting in under-consumption and unrealized welfare gains.
What is the socially optimal quantity of a good (Q) in the presence of a positive externality?
It is the quantity at which MSB equals the marginal social cost (MSC), maximizing social welfare.
What are four possible government responses to positive externalities of consumption?
Subsidising firms
Direct government provision
Positive advertisement
Legislation to make consumption compulsory
How do subsidies help address positive externalities?
Subsidies lower production costs for firms, shifting the supply curve downward, reducing prices, and increasing quantity consumed closer to the socially optimal level.
What are the problems with subsidies as a solution?
High cost to the government (opportunity cost).
Potential inefficiency in private firms due to guaranteed revenue.
How does direct government provision work?
The government directly provides goods like education and health care, often free of charge, ensuring wider access.
What are the issues with direct government provision?
High cost and opportunity cost for the government.
Potential inefficiency and lower quality compared to private firms.
Discourages private investment in these areas.
How does positive advertisement help with positive externalities?
It educates people about the benefits of consuming the good, increasing demand and shifting the demand curve closer to MSB.
What are the limitations of positive advertisement?
High government expenditure (opportunity cost).
The effectiveness depends on how well campaigns influence behavior.
How does legislation address positive externalities?
Laws mandate the consumption of goods (e.g., compulsory education or vaccinations), increasing demand toward the socially optimal level.
What are the drawbacks of using legislation to solve positive externalities?
Resentment from individuals who view laws as infringing on civil liberties.
Additional costs of enforcing the laws.
Success often requires goods to be provided free of charge.
Why is the welfare gain triangle important in understanding positive externalities?
It represents the unrealized social welfare that could be gained if consumption increased from Q1 to the socially optimal level Q*.
What is the correct placement of the welfare gain triangle in diagrams?
Below the MSB curve and above the MSC curve between Q1 and Q*.
What are common pool resources (CPRs)?
Natural resources freely available for anyone to use at zero price, such as fish in the ocean, clean air, and forests.
Why are common pool resources rivalrous?
Because once a resource is consumed, it cannot be consumed again by another person.
Why are common pool resources non-excludable?
It is difficult or impossible to exclude individuals from using them due to their free availability and lack of a price.
What is the ‘Tragedy of the Commons’?
A situation where individuals overuse a shared resource, acting in self-interest, leading to its depletion or degradation.
How do common pool resources differ from private goods?
Common pool resources are non-excludable and rivalrous, unlike private goods which are excludable and rivalrous.
How do common pool resources differ from public goods?
They are rivalrous, unlike public goods which are non-rivalrous.
Why do common pool resources lead to market failure?
The private benefits of use outweigh the private costs, incentivizing over-consumption and depleting the resource.
Give an example of market failure involving CPRs.
Overfishing in oceans leads to the depletion of fish stocks due to their non-excludable and rivalrous nature.
What is an intergenerational negative externality?
Overuse of common pool resources today reduces their availability for future generations
What is the social optimum for using CPRs?
Consuming resources at the rate of replenishment to ensure sustainability, e.g., fishing below the reproduction rate of fish stocks.
What are some government responses to address CPR overuse?
Carbon taxes, cap-and-trade systems, subsidies for sustainable practices, legislation, and collective self-governance.
What is a carbon tax?
A tax on carbon emissions to internalize the external cost of pollution and incentivize cleaner alternatives.
What is a cap-and-trade system?
A system where the government sets emission limits and issues tradable permits to pollute, incentivizing firms to reduce emissions.
What are the limitations of carbon taxes?
Difficulty measuring pollution costs, price inelasticity of fossil fuels, regressive impact on lower-income families, and reliance on alternative energy.
How does overfishing exemplify the ‘Tragedy of the Commons’?
Each fishing vessel maximizes its catch, depleting fish stocks faster than they can replenish, threatening ecosystems and food security.
Why do governments subsidize fishing industries?
to support livelihoods and food supply, but this often leads to unsustainable fishing practices and resource depletion in the long run.
What does the vertical supply curve in the market for pollution permits represent?
The fixed number of permits issued by the government.
What happens when the government reduces the number of pollution permits?
The supply curve shifts inward, and the price per permit increases.
How do tradable permits limit and reduce pollution?
By capping the total number of emissions and creating incentives to innovate cleaner technologies.
What is the main strength of a cap and trade system?
It encourages firms to innovate and reduce emissions due to the cost of permits.
How does a cap and trade system generate government revenue?
By selling emission permits.
What is a significant limitation of the cap and trade system?
Difficulty in monitoring and enforcing carbon emissions.
Why is setting the price for permits challenging in cap and trade systems?
Overpricing can drive firms out of the market, while underpricing reduces incentives for green innovation.
What is a solution to prevent traders from driving up permit prices in a cap and trade system?
The government can restrict trading to carbon-emitting firms.
What does a carbon tax directly set?
The price of carbon emissions.
How does a cap and trade system differ from a carbon tax?
It sets a quota for emissions instead of directly pricing carbon.
What is a similarity between carbon tax and cap and trade systems?
both reduce carbon emissions and can generate government revenue.
How does a carbon tax affect the supply of carbon emissions?
It shifts the supply curve back, increasing the price and reducing emissions.
What is the purpose of subsidizing renewable energy?
To lower production costs, reduce prices for consumers, and increase the use of cleaner energy.
what is a potential downside of subsidies for clean technology?
Opportunity costs, as government funds cannot be used for other objectives.
How does a subsidy affect the supply curve of renewable energy?
It shifts the supply curve outward, lowering prices and increasing quantity demanded.
What is an example of legislation protecting resources?
Limiting fishing licenses and seasons to conserve fish populations.
What is a strength of environmental legislation?
It is most effective when laws are specific and enforcement is feasible.
What are weaknesses of environmental legislation?
High enforcement costs and potential to overly burden industries or insufficiently protect resources.
What is collective self-governance?
Stakeholders collaboratively managing a resource to ensure its sustainability.
When does collective self-governance work best?
When stakeholders communicate effectively and have equitable agreements on monitoring and enforcement.
What is a limitation of collective self-governance?
Power imbalances and conflicting objectives among stakeholders can hinder effective agreements.
What is an example of collective self-governance in action?
The cruise industry in Svalbard, where environmental protection agreements are enforced collaboratively.
Why is fossil fuel use a threat to sustainability?
It generates negative externalities, including pollution and resource depletion.
How does a government subsidy for renewable energy affect market dynamics?
It reduces costs for producers, lowers consumer prices, and shifts resources away from fossil fuels.
What is necessary for addressing positive and negative externalities, such as climate change and vaccinations?
International cooperation is necessary, requiring countries to work together and secure agreements for a sustainable future.
Why is international cooperation often difficult?
Cooperation is challenging due to political disagreements, unequal responsibilities, resource disparities, and issues with monitoring and enforcement.
What historical example demonstrates the global impact of vaccination programs?
The eradication of smallpox, achieved through a global effort led by the WHO starting in 1967, culminating in the last case in 1977.
Why is Tuvalu particularly vulnerable to climate change?
Tuvalu’s highest point is only 4.6 meters above sea level, and rising sea levels regularly flood its arable land, potentially leading to the island’s disappearance within 50 years.
What was the Kyoto Protocol, and why was it considered unsuccessful?
Adopted in 1997, the Kyoto Protocol aimed to limit carbon emissions. However, it was largely unsuccessful because major polluters like China and the United States did not participate.
What are the key challenges in achieving international agreements on climate change?
Lack of shared responsibility.
Inequality of resources.
Political disagreements.
Difficulties in monitoring and enforcement.
What role does the IPCC play in climate negotiations?
The IPCC provides scientific information for governments to develop climate policies, producing reports that serve as the basis for international discussions.
What are some criticisms of the IPCC?
Its estimates are considered conservative.
It does not conduct its own research.
Incidents of data misrepresentation have occurred.
What does the Paris Climate Agreement aim to achieve?
It aims to limit global temperature increases to 2°C above pre-industrial levels, with efforts to further limit warming through greater commitments.
How do carbon emissions create a global negative externality?
Carbon emissions cause air pollution, with marginal social costs affecting the entire planet, including vulnerable nations like Tuvalu.
Why do developing countries struggle with transitioning away from polluting industries?
Developing countries often face poverty challenges and prioritize development policies, such as electricity provision, over climate change prevention.
What was the outcome of the 1992 Earth Summit?
The summit initiated discussions on climate policies, eventually leading to agreements like the Kyoto Protocol and the Paris Climate Agreement.
What are public goods, and why are they an example of market failure?
Public goods are goods that would not be provided in a free market but are necessary and beneficial to society. They represent market failure because the free market cannot provide them without intervention.
Why are public goods called ‘public,’ and what role does the government play?
Public goods are called ‘public’ due to their characteristics, not because the government provides them. The government intervenes to ensure their availability to everyone.
What are the two key characteristics of a private good?
Rivalrous: Consumption by one person reduces its availability to others (e.g., an apple).
Excludable: Others can be excluded from using it if they do not pay (e.g., a concert ticket).
What does it mean for a good to be non-rivalrous?
A good is non-rivalrous if one person’s consumption does not prevent someone else from consuming it. Example: A park bench.
What does it mean for a good to be non-excludable?
A good is non-excludable if it is impossible to stop others from using it once it is provided. Example: A flood barrier.
What are the characteristics of public goods?
Public goods are:
Non-excludable: Everyone can use them once they are provided.
Non-rivalrous: One person’s use does not prevent others from using them. Example: Street lights.
How do private goods differ from public goods?
Private goods are rivalrous and excludable (e.g., a coffee cup).
Public goods are non-rivalrous and non-excludable (e.g., street lights).
What are common pool resources, and how are they categorized?
Common pool resources are rivalrous but non-excludable. Example: Fish in the ocean.
What are club goods, and how are they categorized?
Club goods are non-rivalrous but excludable. Example: A subscription-based streaming service.
Why is there little incentive for private individuals to pay for public goods?
Because public goods are non-excludable and non-rivalrous, others can benefit from them without paying (free-rider problem).
What is an example of a public good and why?
Street lights are a public good because:
Non-excludable: Anyone can use them.
Non-rivalrous: One person using them does not reduce their benefit to others.
What are examples of public goods?
Examples of public goods include:
- Street lights
- National security
- Lighthouses
- Air
- Policing and law enforcement
What is an effective strategy for writing an essay about public goods?
Start with a definition of the key term, introduce a real-world example, and employ that example throughout the essay, not just mention it once.
What is the free-rider problem, and why does it exist?
The free-rider problem occurs when individuals avoid paying for a good or service, expecting others to pay. It exists because public goods are non-excludable, leading to underprovision in the free market.
How does the government address the free-rider problem for public goods?
The government uses tax revenues to fund public goods, ensuring provision despite free riders who benefit without contributing (e.g., non-taxpayers).
What is a free rider in economics?
A free rider benefits from a good or service without contributing to its cost.
Example: A non-taxpayer still benefits from national defense funded by taxes.
What ethical questions arise from mandatory contributions for public goods?
Is it ethical to require pacifists to fund nuclear weapons via taxes?
Should individuals be forced to contribute to something they oppose on moral grounds?
To what extent should ethics influence economic policies like the free-rider problem?
What are quasi-public goods, and what are their two types?
Quasi-public goods partially meet the criteria of public goods. Types:
- Common pool resources: Rivalrous but non-excludable (e.g., fish in the ocean).
- Club goods: Non-rivalrous but excludable (e.g., museums, cinemas).
What is a common pool resource, and why is it rivalrous but non-excludable?
A common pool resource is rivalrous because its use by one person reduces availability for others (e.g., fish in the ocean). It is non-excludable because it’s difficult to prevent people from using it.
What are examples of club goods?
Examples of club goods:
- Museums
- Gated parks
- Cinemas
- Streaming services
Why are club goods not examples of market failure?
The free market can provide club goods because they are excludable (e.g., parks can charge entry fees).
What is a key knowledge question related to the free-rider problem?
To what extent should ethics determine economic theories, such as the free-rider problem?
Why do governments intervene in markets to address public goods?
Governments intervene to reduce or eliminate market failure by either directly providing public goods or covering the costs for private firms to provide them, financed through taxation.
What is the advantage of government provision of public goods?
Government provision eliminates the free-rider problem by using taxes to fund public goods. This ensures everyone contributes to the cost and benefits society as a whole.
Why are public goods often also merit goods?
Public goods like street lights reduce crime, increase safety, and create positive externalities that benefit society more than individual users, leading to a welfare gain.
What is the relationship between public goods and merit goods?
All public goods are merit goods, but not all merit goods are public goods.
What is an example of how economies of scale benefit government provision of public goods?
The government can undertake large-scale projects, reducing average costs as output increases and accessing funding through bonds without prioritizing profitability.
What are some advantages and disadvantages of government provision of public goods?
Advantages:
Improves social welfare by increasing consumption.
Eliminates the free-rider problem.
Achieves economies of scale as the sole provider.
Disadvantages:
Generates an opportunity cost due to financing.
May not be economically efficient.
Quasi-public goods might be better provided by private firms.
How can students improve the structure of a 15-mark essay on public goods?
Instead of listing advantages and disadvantages in separate paragraphs, structure each paragraph around a theme, presenting an argument and its counterargument for better evaluation.
How does contracting out public goods to the private sector work?
The government pays private firms to provide goods. Private firms’ profit motives drive efficiency and capital raising, though higher borrowing costs and shareholder profits may offset this advantage.
What are the limitations of private sector efficiency in providing public goods?
Research shows no clear evidence that private firms are more efficient than public sectors because:
Private borrowing costs are higher.
Firms must generate shareholder profits.
These costs are passed on to consumers.
What factors must Brazilian municipalities consider when switching to LED lighting?
Considerations include:
Higher upfront costs of LEDs.
Long-term energy efficiency and cost savings.
Rising global energy costs.
Budget constraints and opportunity costs.
What is an example of public goods evolving over time?
Streetlights transitioned from private candle lighting (15th century) to public provision (e.g., London’s gas streetlights in 1813), showing how governments address evolving societal needs.
What is an opportunity cost associated with government provision of public goods?
Investing in public goods means other projects or needs might go unfunded, leading to trade-offs in resource allocation.
externalities exist when
there is a divergence between private and social benefits of consumption
why does externality lead to market failure
bc more or less than the socially optimal quantity is produced or consumed
mpc
additional cost of producing an additional unit
msc
cost o producing an additional unit of a good borne by society
mpb
additional benefits individuals enjoy from the consumption of an additional unit of a good
msb
benefits society enjoys from each additional unit consumed
for npe demand which reflects
mpb, = msb
for npe supply =
mpc
in nce, mpc =
msc
