46386
Market failure and
government failure
- Market failure:where the free market mechanism
fails to achieve economic efficiency.
- MPC=costs
incurred by the
firms/individual
carrying out the
action
- MSC=includes
cost of 3rd
party (external)
affected as a
result of
production and
private costs
- Private
costs=benefit
received by
firm/individual
carring out the
action
(consum/prod)
- Social
costs=rewards/gains
to society as a whole
of a particular action
(include external and
private)
- Negative externalities:social
costs>private costs. imposed by a
3rd party over and above costs
directly paid by those carrying out
the activity
- how lead to mf= firms take
pvt costs into account and
dont account for
externalities(overproduction)
- if the externalities had taken
into consideration, supply would
<shift (as less being produced).
too many scarce resources
being used=productive effic
- if the externalities had taken
into consideration, supply would
<shift (as less being produced).
too many scarce resources
being used=productive effic
- how lead to mf= firms take
pvt costs into account and
dont account for
externalities(overproduction)
- MPC=costs
incurred by the
firms/individual
carrying out the
action
- Positive externalities:social benefits>private benefits
- how lead to mf=(underproduced by
firms). underprod of these goods
that create +ve ext as the extreme
benefits arent taken into
consideration
- due to this, demand is
lower than it should be
and too few scarce
resources are being used
- due to this, demand is
lower than it should be
and too few scarce
resources are being used
- how lead to mf=(underproduced by
firms). underprod of these goods
that create +ve ext as the extreme
benefits arent taken into
consideration
- Merit/demerit/public goods
- Merit goods=have
more private
benefits and
greater postive
effect than
consumers know
- Demerit goods=more
harmful goods than
consumers realise,
and they generate
negative externalities
- Public
goods=have non
excludability and
non rivalry
- why lead to
mf=consumed
collectively so
impossible to charge
people for their use.
unlikely that freemarket
would provide these
goods
- so underprovided
even though they
are required by
consumers
- so underprovided
even though they
are required by
consumers
- why lead to
mf=consumed
collectively so
impossible to charge
people for their use.
unlikely that freemarket
would provide these
goods
- Quasi
goods=have some
of characteristics
of public goods
- Merit goods=have
more private
benefits and
greater postive
effect than
consumers know
- Methods of intervention(to correct market failure)
- State provision (govt provide it)
- +ve would correct the underprovision (supply)
- -ve opportunity cost;could be
spent elsewhere, doesnt
guarantee increased
consumption
- +ve would correct the underprovision (supply)
- Indirect taxes
- +ve discourage
overprod of demerit
goods, increase govt
revenue
- -ve no affect if youre
addicted, decreases AD,
demerit-inelastic so not
affected
- +ve discourage
overprod of demerit
goods, increase govt
revenue
- Subsides
- + undersupply
of merit,
incerased price
level
- -ve opportunity
cost-money could be
spend best elsewhere,
depends on size/how its
used, may also need a
regulation in place
- + undersupply
of merit,
incerased price
level
- Regulations
- +ve correct
information
failure, controls
consumption of a
particular good
- -ve takes
time,
costly to
regulate
- +ve correct
information
failure, controls
consumption of a
particular good
- Pollution permits
- +ve reduces
pollution,
forces them
to be more
efficient
- -ve costly, hard to
regulate, get fined if go
over
(irreleveant/ineffective
to MNCs
- +ve reduces
pollution,
forces them
to be more
efficient
- Provision of information
- + correct
info/assymetric
failure, learn
about
merit/demerit
goods
- -ve time,
hard to
understand
fully
- + correct
info/assymetric
failure, learn
about
merit/demerit
goods
- State provision (govt provide it)
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