market failure

• An externality is the cost or benefit a third party receives from a transaction outside the market mechanism. The sis also known as the spill over effect of the production.or consumption of a good or service.
• positive externality = external benefit
• negative externality = external cost
• Negative Externalities is caused by overproduction and consumption in the economy and cause detrimental effects to third parties.
• Examples of negative externalities = cigarettes, alcohol, pollution, noise pollution
• externalities are unintended side effects or consequences of economic activity that are not included in the price of the good or service.
• externalities effect third parties who aren't necessarily direct consumers of a good or service
• market failure is the misallocation of resources in an economy; the Market isn't efficient of equitable revealing a net loss of social welfare
• a private cost is an internal cost faced by producers or consumers
• an external cost is when social cost is greater than private cost
• a private benefit is the satisfaction or utility that an individual or firm receives
• an external benefit benefits reviewed by society derived from private benefits
• a marginal private cost is the cost to a firm producing one extra unit of a good
• a marginal private benefit is the extra satisfaction or utility gained by a consumer or producer from consuming an extra unit
• the marginal external cost is the cost to third parties from producing extra units of output
• the marginal social cost is the total cost to society from producing and consuming extra units
• private cost + external cost = social cost
• the social optimum is where marginal social cost = marginal private benefit as it has taken externalities into account
• the marginal social benefit is marginal external benefit + marginal private benefit
• economic agents do not take the costs their decisions impose on others, which leads to negative externalities and a misallocation of resources
• a positive externality is when the social benefit is greater than the private benefit
• the marginal social benefit is where marginal social cost = marginal private cost
• when the social costs are greater than the private benifits, this is called the dead weight welfare loss
• positive externalities are often underproduces and under consumed
• a mixed externalitie is when production and/or consumption lead to both external costs and external benefits. The social optimum depends on the extent of the positive and negative externalities
• cars and pesticides have mixed externalities
• merit goods are under-consumed and will not make a profit from private firms
• government intervention is needed for merit goods, such as subsidies, regulations, taxation and advertising
• information failure is when consumers aren't aware of the benefits of consuming certain goods
• education, vaccinations, the NHS, libraries and clean energy are examples of merit goods
• merit goods are positive externalities a she social benefit exceeds private benefit
• demerit goods have negative externalities and are over consumed, the pullover effects will be mainly harmful and with he absence of gov intervention may be excessively consumed
• tobacco and cigarettes are examples of demerit goods
• taxes or min./max. price flaws may be put onto goods to stop purchases
• imperfect/asymetric information: consumers may not be aware of long term benefits or negatives of a good
• misleading advertising may downplay the negative externalities of goods
• a public good is non rivalry and non excludable
• non rivalry is when consumption by one person does not affect supply for another
• non excludability is when the good is provides by the state
• a free-rider is someone who gains from public goods but does not contribute