Market failure and externalities (OCR A-Level Economics): Flashcards
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Market failure
Market failure
Inefficient allocation leading to net social welfare loss
MSC components
MSC components
(private cost + external cost)
Marginal External Cost (MEC)
Marginal External Cost (MEC)
Cost imposed on third parties from production/consumption
Marginal Private Cost (MPC)
Marginal Private Cost (MPC)
Additional cost to producer from producing one more unit
MSB components
MSB components
(private benefit + external benefit)
Marginal External Benefit (MEB)
Marginal External Benefit (MEB)
Benefit to third parties from production/consumption
Marginal Private Benefit (MPB)
Marginal Private Benefit (MPB)
Additional benefit to consumer from consuming one more unit
Externalities
Externalities
Side effects on third parties not reflected in market prices
Public goods: two characteristics
Public goods: two characteristics
Non-excludable and non-rivalrous
Positive externalities: market outcome
Positive externalities: market outcome
Under-allocation; Q produced below socially optimal level
Negative externalities: market outcome
Negative externalities: market outcome
Over-allocation; Q produced above socially optimal level
Govt intervention for positive externalities
Govt intervention for positive externalities
Subsidies, public provision, or tax incentives
Govt intervention for negative externalities
Govt intervention for negative externalities
Taxes, regulations, or pollution permits
Education as positive externality
Education as positive externality
Benefits society via higher productivity & innovation
Factory pollution as negative externality
Factory pollution as negative externality
Imposes health & environmental costs on community