8. Market failure Flashcards
market failure
suboptimal allocation of resources, when CS isn’t maximized, when provision is greater or less than social optimum
externality
when the consumption or production of goods and services imposes costs or benefits on third parties (INDIRECT)
negative externality
when production or consumption leads to a cost (harmful)
positive externality
when the produciton or consumption leads to a benefit ( beneficial)
demand curve is now
benefit
supply curve is now
cost
MSC
cost society pays when producing one further quantity of a good, MPC+MEC
MPC
cost a firm pays when producing one further quantity of a good
when is MSC=MPC
no externality in the production process, MEC=0
MSB
demand curve, MPB + MEB
MPC
represent people selling the good (supply)
MPB
represent people who are buying the good (demand)
when is MSB=MPB
no externality in the consumption process, MEB=0
when is MSC=MSB
market is working at a social optimum, resources used as efficiently as possible
positive externality of consumption
a third party benefits from the consumption of a good, MSB>MPB
vaccine example for PEC
less risk of contracting a disease, better health closer to herd immunity
Q* on a graph
social optimum
potential welfare gain
getting PC or CS back by eliminating/reducing externality, distance between Q^x and Q*
welfare loss
“loss of consumer / producer surplus when less/more than the socially optimal output is produced / consumed (externality)
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merit good
beneficial to consumers but are underconsumed because potential benefits are ignored or underestimates, usually brings great social benefits
merit good example of university education
a more educated population –> important technological innovations and productive society
merit good example of public sports facilities
better health, good hobby–> fitter population–> more productive society + live longer
how can the govy increase welfare related to PECs and underconsumptions of MerGs?
LIS
- Legislation: pass law to make consumption mandatory
- Improve information about benefit of product through increasing public awareness 3. Subsidy or direct provision by the gov
subsidy to “solve” PECs and increase welfare
shift MSC downwards the size of the externality –> new social level of consumption to be reached at Q^1