Market failure

How do markets fail?

lack of provision of public goods (vs. merit goods)

existence of externalities
inequality of income and wealth distribution
monopoly power concentrated into the hands of a few

Externalities
Externalities include benefits or costs for the third party, while the opposite is fully at the side of the
1st party. They are unintended outside influences of the market or business.
The classification of externalities is subjective (I might like the scent of flowers, but you might be
allergic).
Positive
Cost (private)
Benefit (private)
Benefit (public)

Negative
Cost (private)
Cost (public)
Benefit (private)

Producer

(http://sangecon.files.wordpress.com/2010/03/graph-111.png)

a factory (the dust)

(http://www.economicsonline.co.uk/Market%20failures%20graphs/Externalitiespositive-production.png)

someone having bees (they pollinate

the whole area)

Consumer

(http://tutor2u.net/economics/revision-notes/merit-goods-1.jpg)

girls wearing make-up

(http://12tamito.files.wordpress.com/2011/03/e382b9e382afe383aae383bce383b3e382b7e383a7e38383e38388efbc88201103-14-14-01-42efbc89.png)

smokers smoking

MSB Marginal Society Benefit

MPB Marginal Private Benefit
MPC Marginal Private Cost
MSC Marginal Society Cost
What do the triangles in the graphs mean? DWL dead weight loss:
what could be, but is not
o
o

positive externality
potential welfare gains
negative externality
welfare losses