Section 5: Market Failure Flashcards
When does a market fail
When the price mechanism fails to allocate scarce resources efficiently and society suffers as a result
What is an externality
The effects that producing or consuming a good or sevice has on people who aren’t involeved in making, buying or selling and consumption of the good or service
What can happen if externalities are ignored
Market failure
What is a private cost
The cost of doing something to either a consumer or a firm
What is social cost
External cost plus private cost
What is marginal private cost
The cost of producing the last unit of a good
What is marginal social cost
The marginal private cost plus the external cost
How can you see the external cost on a diagram with Price, costs, benefits being the y-axis and quantity being the x-axis
The gap between the marginal social cost and the marginal private cost is external cost
If the marginal social cost curve is parallel to the marginal private cost then what does that tell you about the external cost
The external cost is constant
What is marginal private benefit
The benefit to someone of consuming the last unit of a good
What is marginal social benefit
The marginal private benefit plus the external benefit
What is the difference between the marginal private benefit curve and the marginal social benefit curve
The positive externalities
In a free market where does equilibrium occur with relation to the marginal private cost and the marginal private benefit
Equilibrium occurs when the MPC=MPB
This is because in a free market consumers and producers only consider their pricate costs and private benefits - they ignore any social costs or benefits - as a result the MPC curve can be seen as teh supply curve of a good or service and the MPB curve can be seen as the demand curve
So equilibrium occurs when MPC=MPB
In a free market at what point is the socially optimal point
Where MSC=MSB
What happens to the production and pricing of a good if only the private costs are considered
Leads to overproduction and underpricing
