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Economics Y11
5. Market Failure
Externalities
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Created by
Beth Duuring
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Cards (25)
Market failure
When
allocative
efficiency is not achieved, resulting in
under
or
overallocation
of resources (not socially
optimal
)
Allocative efficiency
Achieved when D=S or when MB=MC
Demand
Marginal benefit
Marginal benefit
The
additional
benefit of
consuming
one
more
unit of the good
The
more
you consume of a good, the
less
happiness each additional object brings
Supply
Marginal cost
Marginal cost
The
additional
costs of
producers
pay to produce one more
unit
of the good
Marginal private cost (MPC)
Cost
to
producers
of producing one more
unit
of good
Marginal social cost
(
MSC
)
Cost to society of producing one more unit of good
Marginal external cost (MEC)
The
additional
cost imposed on
third
parties by the consumption of an
extra
unit of a good or service
Marginal external benefit (MEB)
The
additional benefit
imposed on
third
parties by the
consumption
of an
extra
unit of a
good
or
service
Marginal
private
benefit (MPB)
Benefits
to consumers from
consuming
one more unit of a good
Marginal social benefit (MSB)
Benefits to society from
consuming
one more
unit
of a good
When MPC = MSC and MPB=MSB, socially
optimal
equilibrium
is achieved
If there is a different between
social
and
private
, not good
Externalities
Occur when the
production
or
consumption
of a good/service cause
external
costs and/or
external
benefit
Externalities
They are the
side effects
of economic activity or
unintended
consequences
of economic activity
The side effects impact a
third
party
Externalities
Cause market
failure
if the price mechanism (i.e. Price) does not take into account the
social
costs and benefits of
production
and
consumption
Market failure
When the
external
benefits/cost are not
recognised
, leading to miss
allocation
Negative externalities
Occurs when
production
and/or
consumption
creates an
external
cost (to society)
Negative externalities
Causes
overconsumption
/production
Market quantity is
greater
than optimal quantity, but we should be producing
less
because it is
harmful
to society
Market price is
less
than optimal price
Negative externalities result in
deadweight loss
Positive externalities
External benefits of consumption or production for
third
parties
Positive
externalities
Benefits are not
recognised
, hence there is too
little
of the good being produced or consumed, therefore there is
DWL
Causes
under
consumption or production
Positive
externalities result in
deadweight
loss