Economics Review Market Failure Markets are not working to well There is not an optimum allocation of resources We have

have a market failure and this causes gov to step in The causes for market failure are: Pos and Neg externalities, lack of public goods, Underprovisions of merit goods, over provision of demerit goods, threats to sustainability

Externalities An externality exists when the production or consumption of a good or service has an effect upon a third party (spill over effect) This tells us that market has failed to allocate resources property In reality, the market represents the private forces of demand and supply Benefits and costs are not represented in the model Consumers=utilities, producers=profits, production=returns Demand curve is MPB, Supply curve is MPC MSC=to MPC plus or minus any cost or benefit of production MSB=to MPB plus or minus any external cost or benefit of consumption No externalities msc=mpc

Positive Externalities of production Workers trained and go to other company example The MPC of the firm is greater than the msc so a new supply curve is made showing the benefits The government can: subsidize, give tax cuts, and legislate. Problem is that the gov will have Trouble estimating the amount to subsidize This causes opportunity cost as gov has to cut back in other areas Positive externalities of consumption Everyone on you street but you fixes their home. This makes yours worth more. The Msb of healthcare is greater than the MPB the welfare gain is shown by the tri Subsidize, legislate, adds

Negative externalities of production Things like environment are good example (good ol polluting factory) MPC is below MSC as there is an extra cost to society by pollution (breathing probs) This is a misallocation of resources Gov can try to tax, but it is difficult to measure how much to do, best thing is permits

Negative externalities of consumption Noise pollution and second hand smoke are examples

Public Goods Bring benefit to society, but not found in free market The only true examples are flood barriers and the military Lack of public goods are a market failure Public goods are non-excludible and non-rivalries Governments may provide outright or subsidize

Underprovisions of merit goods Merits goods consumption creates external benefits They will be underprovided by the free market because of this they will be under consumed The private optimum level is less than the social optimum level All public goods are merit goods Govt can offer a subsidy to modify the supply of a merit good or start an ad campaign to encourage use such as going to the docs twice a year.

Overprovision of demerit goods Consumption of demerit goods creates an external cost They are over provided by the market and as such are over consumed They are ones that the gov thinks is bad for the consumer such as chips and cola, and so they can place a tax on them and run a campaign against them to try to lower them Gov can legislate to ban unhealthy foods