market failure

• market failure 


  when the price mechanism fails to allocate scarce resources efficiently or when the operation of market forces lead to a net social welfare loss
• consumer and producer surplus

  consumer ~ below demand line above equilibrium price (measure of economic welfare)

  producer~ above supply line, below the price equilibrium ( measure of producer welfare)

  consumer + producer surplus = society surplus
• consumer surplus 


  the difference between what the consumer pays and what they would have been willing to pay
• producer surplus


  the difference between the price a firm receives and the price it would be willing to sell it at
• absolute poverty 


  when an individual is living on an income below an accepted minimum level, such as £1 per day
• relative poverty


  affects households in lower percentile of income in an economy. relative poverty will always exist wherever there is inequality
• government methods of attempting to tackle poverty

  • government ran food banks
  • price controls (maximum and minimum)
  • benefits and welfare
  • national minimum wage
  • free school meals ~ zero price provision
• what can inequality cause (positively)?

  • incentives to work harder
  • gain more qualifications
  • improve attendance
• maximum price


  used as a means of ensuring low-income households are not priced out of market

  • set below the free market price
  • government or industry regular can set price
• black markets

  illegal unregulated market in which the market price is higher than a legally imposed price ceiling (max price)

  caused when there is excess demand
• government intervention ~ legislation

  through legal statute using an act of parliament that creates new laws
• government intervention ~ regulation

  reduces external costs

  monitoring who and how much a person can have access to / produce a good or service
• government intervention ~ taxation

  indirect or direct

  adds to the price to consume / produce a good

  decreasing demand or supply
• government intervention ~ tradable permits

  seek to combine market incentives with command and control measures

  e.g pollution
• consumer sovereignty 


  consumers are free to spend their money in the way that will ensure they gain the greatest benefit
• externalities

  unpaid costs

  negative or positive

  third party affects arising from production and consumption of goods and services for which no appropriate compensation is paid
• positive externalities in consumption

  e.g. education

  marginal social benefit > marginal private benefit

  externality points right

  above supply curve, below msb curve
• negative externalities in consumption

  e.g smoking

  marginal private benefit > marginal social benefit

  externality points left

  below supply line, above msb line
• positive externalities in production

  marginal private cost > marginal social cost

  externality points right

  below demand curve, above msc curve
• negative externalities in production

  marginal social cost > marginal private cost

  externality points left

  above demand curve, below msc curve
• asymmetric/imperfect information

  lack of information in market between consumer and producer

  can mean merit goods tend to be under provided and under consumed

  and demerit goods tend to be over provided and over consumed
• importance of property rights

  property rights confer legal control or ownership

  if unowned then no one has the incentive to protect it from abuse