Market failure and government failure

Market failure:where the free market mechanism fails to achieve economic efficiency.
1. MPC=costs incurred by the firms/individual carrying out the action
2. MSC=includes cost of 3rd party (external) affected as a result of production and private costs
3. Private costs=benefit received by firm/individual carring out the action (consum/prod)
4. Social costs=rewards/gains to society as a whole of a particular action (include external and private)
5. Negative externalities:social costs>private costs. imposed by a 3rd party over and above costs directly paid by those carrying out the activity
  1. how lead to mf= firms take pvt costs into account and dont account for externalities(overproduction)
    1. if the externalities had taken into consideration, supply would <shift (as less being produced). too many scarce resources being used=productive effic
Positive externalities:social benefits>private benefits
1. how lead to mf=(underproduced by firms). underprod of these goods that create +ve ext as the extreme benefits arent taken into consideration
  1. due to this, demand is lower than it should be and too few scarce resources are being used
Merit/demerit/public goods
1. Merit goods=have more private benefits and greater postive effect than consumers know
2. Demerit goods=more harmful goods than consumers realise, and they generate negative externalities
3. Public goods=have non excludability and non rivalry
  1. why lead to mf=consumed collectively so impossible to charge people for their use. unlikely that freemarket would provide these goods
    1. so underprovided even though they are required by consumers
4. Quasi goods=have some of characteristics of public goods
Methods of intervention(to correct market failure)
1. State provision (govt provide it)
  1. +ve would correct the underprovision (supply)
  2. -ve opportunity cost;could be spent elsewhere, doesnt guarantee increased consumption
2. Indirect taxes
  1. +ve discourage overprod of demerit goods, increase govt revenue
  2. -ve no affect if youre addicted, decreases AD, demerit-inelastic so not affected
3. Subsides
  1. + undersupply of merit, incerased price level
  2. -ve opportunity cost-money could be spend best elsewhere, depends on size/how its used, may also need a regulation in place
4. Regulations
  1. +ve correct information failure, controls consumption of a particular good
  2. -ve takes time, costly to regulate
5. Pollution permits
  1. +ve reduces pollution, forces them to be more efficient
  2. -ve costly, hard to regulate, get fined if go over (irreleveant/ineffective to MNCs
6. Provision of information
  1. + correct info/assymetric failure, learn about merit/demerit goods
  2. -ve time, hard to understand fully

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Market failure and government failure

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