Market Failure Flashcards
1
Q
Supply
A
MPC (MSC)
1
Q
Demand
A
MPB (MSB)
2
Q
direction welfare loss point to when negative
A
Left
3
Q
direction welfare loss point to when positive
A
right
4
Q
Negative production externality
A
- diagram shows negative production externality
- Example
- When a firm does this, they pay a very little cost to do so (MPC is low)
- currently in free market we are producing and consuming at Q
- However this is not the social optimum which is at Q*
- At Q* MSB = MSC
- At current level of output, Society is paying at higher cost (MSC) than the private firm
- damage done by this unit is the externality
Free market not considering this - Total cost to society by producing at Q is the red triangle which is the welfare loss/deadweight loss
- Without intervention we have overallocation of resources and an overall cost to society.
5
Q
Example of NPE
A
- Oil leakages
- Air pollution
- Noise pollution
- Water pollution
6
Q
allocation of resources in Positive production externalities
A
- Underallocation
7
Q
Example of PPE
A
- resource extraction
- recycling (company)
- research
8
Q
If the externality is consumption, what line does it affect
A
MSB
9
Q
Negative Consumption externality
A
- Diagram shows negative Consumption externality
- Example : people smoking cause spillover effect
- Private consumer benefit while society did not
- Private consumer have higher benefit than society (MPB higher than MSB)
- Currently in free market we are producing and consuming at Q
- However this is not the social optimum at Q*
- At Q* MSB=MSC
- At current level, private is getting more benefit (MPB) than society (MSB).
- Damage done by this is the externality
- Free market not considering this
- total cost to society by producing at Q is the black triangle which is the welfare loss
- without intervention we have over allocation of resources and overall benefit to private consumers
10
Q
Negative externalities
A
MSC > MPC
MSB < MPB
11
Q
Positive externalities
A
MSC < MPC
MSB > MPB
12
Q
Definition of Marginal Social and private benefit and cost
A
The social and private costs and benefits of their last unit is either produced or consumed
13
Q
A
