1.3 Market Failure

• Draw a negative externalities diagram

  Is MSB=MPB? Is the MPC curve above the MSC curve? Have you labelled your welfare loss? Have you labelled your private equilibrium and social optimum?
• Draw a negative externalities with tax diagram in reality

  Is MSB=MPB? Is the MPC curve above the MSC curve? Have you labelled your change in welfare loss, private equilibrium and social optimum? Why does the tax only partially eliminate the welfare loss?
• Draw a negative externalities diagram with tax


  Is MSB=MPB? Is the MPC curve above the MSC curve? Have you labelled your welfare loss, private equilibrium, social optimum and change in the welfare loss area? Have you shifted your curve enough to eliminate the welfare loss?
• Draw a positive externalities diagram

  Is MSB above MPB? Is MPC=MSC? Have you labelled the potential welfare gain, social optimum and private equilibrium?
• Draw a positive externalities diagram with a subsidy

  Is MSB above MPB? Is MPC=MSC? Have you labelled the potential welfare gain, social optimum and private equilibrium? Have you shifted MPB enough to eliminate the potential welfare gain?
• Draw a positive externalities diagram with a subsidy in reality

  Is MSB above MPB? Is MPC=MSC? Have you labelled the potential welfare gain, social optimum and private equilibrium? Have you shifted MPB without fully maximising welfare? Why is not all welfare gained in reality?