This is a draft cheat sheet. It is a work in progress and is not finished yet.
Market Failure
where the free market does not make the best use of scarce resources. |
- where the outcomes of a free market differ from the socially optimal outcomes. |
When does 'Market Failure' occur?
occurs when the free market fails to efficiently allocate goods and services. |
Reasons for Market Failure
1. Externalities |
2. Public Goods |
3. Asymmetric Information |
4. Abuse of Market Power |
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Externalities
1. Positive Externality |
where the side effects have a positive impact and provide benefits to third parties. |
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2. Negative Externality |
where the side effects have a negative impact and impose costs to third parties. |
Reasons of Market Failure: Externalities
MSC (marginal social cost) is above the MPC (marginal private cost). |
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- MPC is the Supply Curve and DD is the demand curve |
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Equilibrium: Supply = Demand |
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Social Optimum output level is achieved at Q’ where MSC = DD = MSB |
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SC of Production & SB of Consumption
Social Cost (SC) of Production |
SC = |
Private cost incurred by the firm (PC)+ Externalities |
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Social Benefit (SB) of Consumption |
SB = |
Private benefit enjoyed by consumers+ Externalities |
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