Market failure

• Market failure

  Occurs when markets fail to deliver an efficient or equitable allocation of resources

  Due to equity and efficiency
• Why do markets fail

  Externalities

  Public good and quasi-public goods are not profitable

  Factor immobility

  Equity issues
• Types of market failure

  Partial market failure occurs due to the over or under production of goods and services

  complete market failure occurs when markets are missing entirely
• Productive efficiency

  Occurs when a firm produces at its lowest average cost. Means it must be producing at its maximum output for its given inputs. If all firms are productively efficient, the economy would be producing on the PPF
• cost

  The value of the economic resources used in the production process of a good or service

  Costs can be reduced through specialisation, new technology, training, increasing scale of production (EOS), reallocation to LEDCs
• Pareto efficiency

  Occurs when no one can be made better off without making someone else worse off, so all points on the PPF.

  Pareto improvement occurs when someone can be made better off without making others worse off
• Pareto efficiency and equity

  An outcome may be viewed as a Pareto improvement yet the outcome may still be unfair.
• Allocative efficiency

  Occurs when the welfare of society is maximised. It is concerned with whether resources are used to produce goods that consumers wish to buy

  Price- affordable?

  Sufficient production?

  Occurs at equilibrium price
• Price effect on social welfare

  At equilibrium, welfare is maximised as PS+CS is largest

  If prices above equilibrium, PS is larger yet deadweight loss meaning total welfare is smaller

  If prices below equilibrium, CS is larger, yet deadweight loss meaning total welfare is lower
• Social welfare equation

  Social welfare/ net benefit= value of social - value of social costs

  Benefits exceed costs if welfare
• Social benefit

  The satisfaction or benefit that society derives from an economic activity

  social benefit= private benefit + external benefit
• private benefit

  The satisfaction or benefit received by individuals involved in an economic activity
• external benefit

  The satisfaction or benefit that third parties (those who are not involved in the economic activity or decision) receive from an economic activity

  External benefits mean social benefits exceed private benefits
• Social costs

  the cost or negative effect that society incurs from an economic activity

  Social cost= private cost + external cost
• private cost

  The cost or negative effect incurred by individuals involved in an economic activity
• external cost

  the cost or negative effect that third parties (those not involved in the economic activity or decision) incur from an economic activity

  External costs meaning social costs exceed private costs
• Externalities

  A benefit or cost to a third party from an economic activity or deacon undertaken by others

  Positive externalities are external benefits

  Negative externalities are external costs
• Marginal social benefit

  The satisfaction/ utility that society derives from the consumption/ production of an extra unit of a good or service

  MSB=MPB+MEB