Market failure(Chapter 14)

Question 1

What is market failure?

Answer 1

Market failure occurs when the free market system fails to function as intended. The goal of the market is to allocate resources efficiently by letting the interaction of supply and demand decide prices and quantity. Sometimes, the market doesn’t take into account of all of the costs and benefits of a product. Which can then lead to, important products that contribute to improving society, such as clean air or education, being under-provided or it might result in situations wherethe market offers an excessive amount of something harmful to society, like unhealthful food or pollution.

Question 2

Consequences of market failure

Answer 2

• Public goods will not be provided
• Too few merit goodd will be supplied and consumed
• Demerit goods will be over-supplied and consumed
• Some firms may exploit their consumers and employees
• Factor immobility obstructs the ability of firms to allocate resources efficiently
• Goods and Services will significant external costs may be over-provided
• Goods and Services with significant external benefits may be under-provided.

Question 3

Positive and negative externalities

Answer 3

Positive externalities:
- Investments in technological advances and employee training can create positive externalities, benefiting society.
- Private sector investments in areas like healthcare and medicine can improve public health, reduce costs, and enhance quality of life.
- Examples include patient-friendly devices for administering medication at home and advancements in laser technology with various applications.

Negative externalities:
- Activities by firms can lead to negative externalities such as pollution and environmental destruction.
- Negative externalities impose costs on others who did not agree to or benefit from the harmful actions.
- Examples include oil spills causing damage to marine life and communities, resulting in economic losses and environmental harm.

Question 4

Social costs and benefits

Answer 4

Social costs:
- Private sector firms often focus on their own private costs and may disregard external costs imposed on society.
- Social costs include both the private costs of production and the external costs imposed on others.
- For example, pollution caused by a firm’s activities can result in significant costs to nearby communities and organizations.

Social benefits:
- Private sector firms may also create external benefits or positive externalities.
- These benefits can include the production of goods and services that enhance living standards, provide employment, and improve societal well-being.
- Examples include the supply of materials used in labor-saving products or the training of workers in valuable skills.

Total social cost and benefit:
- The total social cost is the sum of private costs and external costs, representing the overall negative impact on society.
- The total social benefit is the combination of private benefits and external benefits, reflecting the positive impact on society.
- Evaluating the total social cost and benefit helps determine if resources could be better utilized in alternative activities that are less harmful or generate more external benefits.

private costs + external costs = total social cost

private benefits + external benefits = total social benefit

Question 5

An economic or uneconomic use if resources

Answer 5

Economic use of resources:

• An economic use of resources occurs when the total social benefit exceeds the total social cost.
• It raises economic welfare and benefits society as a whole.
• Resources are allocated efficiently, and the social benefits created outweigh the social costs.

Uneconomic use of resources:

• An uneconomic use of resources happens when the total social cost exceeds the total social benefit.
• Society is made worse off, even if some individuals or firms generate profits or external benefits.
• Allocating resources to alternative uses would result in higher economic welfare.

Profit-oriented perspective:

• Private firms primarily focus on making profits and may overlook external costs and benefits.
• Activities that are not profitable for firms may still generate significant social benefits.
• Examples include investments in healthcare, medical advances, parks, and open spaces.