2.8 market failure and externalities Flashcards
what is market failure?
when the free market output does not lead to a socially optimum allocation of recourses, such that there is over or under consumption or production. economic and social welfare is not maximised.
what is an externality?
a cost or benefit that a third party receives from an economic transaction outside of the market mechanism- the spillover effect of production or consumption.
what is a merit good?
a good in which consumers are not aware of the long run negative effects of consuming the good and therefore are over provided.
e.g cigarettes
what is a demerit good?
a good in which consumers do not realise the extent of the benefits received, these are under provided
what is a private cost?
the cost of production
what is a social cost?
private costs + external costs
what is a private benefit?
the benefit to the consumer from consumption.
what is a social benefit?
private + external benefits
what is the socially optimum position?
where MSC=MSB
what is a negative production externality?
there is too much production. supply is too high.
social costs > private costs
e.g air pollution from factories, industrial waste, methane emissions
what is a negative consumption externality?
there is too much consumption, demand is too high.
MSB<MPB
e.g obesity, litter, traffic congestion
what is a positive production externality?
there is too little production. supply is too low
MPC>MSC
e.g flood defence, renewable energy , reduce deforestation, beekeeping and pollination.
what is a positive consumption externality?
there is too little consumption, demand is too low.
MSB>MPB
e.g childcare, healthcare, education, mass transport
what are some government policies for negative externalities?
indirect tax
subsidies
regulation
direct provision
provision of information
