Chapter 7 - Chapter 7 Market failure Outline Market failure...

Info icon This preview shows pages 1–9. Sign up to view the full content.

View Full Document Right Arrow Icon
Chapter 7 Market failure
Image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Outline Market failure Externalities Positive externalities Private and social benefits Negative externalities Private and social cost Market regulation, tax and subsidies Public goods and private goods
Image of page 2
Market failure In perfect world, market efficiency is achieved if the quantity demand equal to quantity supply or price of demand equal to price of supply. However, the world is imperfect and market fail to achieve efficiency.
Image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Market failure Market failure Are imperfections in the exchange process between buyers and sellers that prevent markets from efficiently allocating scare resources. Causes of market failure It means that the price in the market do not fully reflect the value of production. Supply price and demand price are not equal. It comes in four varieties Externalities Public goods Market control Imperfect information
Image of page 4
Externalities An externalities is the cost or benefit that affects a party who did not choose to incur that cost or benefit. Two types of externalities Positive externalities Negative externalities Here, every activity has benefits/costs that work on two level: Private The total benefits/costs incurred by the individual producing or consuming the product or service directly. External The total benefits/costs associated with any activity incurred by a third party.
Image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Positive externalities Is a benefit that is enjoyed by a third- party as a result of an economic transaction/ activity. It leaves a positive effect on a third party, Example: When you consume education you get a private benefit. But there are also benefits to the rest of society. E.g you are able to educate other people and therefore they benefit as a result of your education.
Image of page 6
Positive externalities Social benefits Social benefit = Private benefit + External benefit With positive externalities the benefits to society is greater than your personal benefit. Therefore, with a positive externality, marginal social benefits is greater than marginal private benefits (MSB > MPB).
Image of page 7

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Positive externalities In free market consumption will be at Q1 because demand = supply (private benefit=private cost). However, this is socially inefficient because social benefit > private benefit. Therefore there is under consumption of the positive externality. Social efficiency would occur at Q2 where social cost=social benefit. Example: In a free market without government intervention, there would be under-consumption of education and public transport.
Image of page 8
Image of page 9
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern