Market outcomes with taxes

Market outcomes with taxes - Economic Market Failure when...

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Economic Market Failure – when the market outcome is NOT efficient. 1. Imperfect information (moral hazard, adverse selection) 2. Imperfect competition (monopoly, oligopoly) 3. Externalities 4. Public Goods I. Externalities – effects, either positive or negative, on parties not directly involved in the production or consumption of a good. Also called 3 rd party effects. A. Positive Consumption Externalities (MSB > MPB) Examples: 1. Education – when someone educates herself or himself, it is not only that person who benefits. All of society benefits because better-educated people work better together and can figure out new approaches to solving problems, solutions that benefit everyone. 2. Flu vaccination – by getting vaccinated you lower your own risk of getting the flu, but by avoiding the flu you also lower the risk of passing it to others (who may not be vaccinated). Again, many people benefit.
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If a positive consumption externality exists, then the market outcome yields too little of the g/s (and too little is spent on the g/s). P MC P e P* MSB MPB = D Q* Q e Q Demand is given by the MB of the buyer’s of the g/c (MPB), but with appositive consumption externality, there are external benefits to the rest of society. In this case, the MSB exceed the MSC at the market equilibrium (Q*, P*). There would be efficiency gains if more were produced (until MSB = MSC). The lost efficiency due to the externality is the DWL of the externality (shaded area). B. Negative Consumption Externality (MSB < MPB) Examples: 1. Smoking tobacco creates fumes that many people find annoying and that present a health risk. Privately (personally), the individual enjoys the product more than society as a whole.
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