2.8 Market Failure

• Externalities


  The unintended positive or harmful effects on a third party when a good or service is consumed or produced
• Externality example


  • Education - Benefits to yourself due to receiving an education but also benefits society
• Demand


  Can also be known as marginal benefit
• Supply


  Can also be known as marginal cost
• Price


  Can also be called marginal benefit
• When marginal private costs = Marginal Social Costs


  It is a market with no externality
• When Marginal Private Benefit = Marginal Social Costs


  It is a market with no externality
• It is rare for a market to have no externality
• Marginal Private Benefit/Cost


  How much do I (as a private consumer) benefit/cost
• Marginal Social Benefit


  How much do society benefit/cost
• Free/Qfree is the P/Q in a free market
• Qopt


  The optimal quantity
• The marginal social cost outweighs the marginal social benefit in the diagram above
• The Smoking Teacher


  A negative externality
• The MPS is to the left of the MSB


  There are more social benefits than private benefits to education
• In externalities, if consumption occurs, the demand curve moves
• In externalities, if production occurs, the supply curve moves
• Merit Goods


  Goods desirable for consumers but are under-allocated by the market
• Demerit Goods


  Undesirable for consumers, but over-allocated by the market
• When drawing welfare, the triangle will always point towards the optimal point
• The triangle in welfare drawing indicates that society loses
• Common Pool Resources


  Rivalrous: If one ‘person’ consumes it, takes away from others; Non-excludable: Cannot limit or exclude access to the good and service