1.5.1-Market failure and externalities

• Market - when a free market fails to allocate scarce resources at socially optimum level of output
• Negative externalities-self interest of firms and consumers 
• Positive externalities- ignore impact for 3rd party.
• De-merit goods could lead to rash descions
• public goods - profit motivated firms which Means there not enough public goods 
• Monopoly power → one dominant seller and higher barriers to energy  
• Negative externalities-Costs on third party on actions of a separate agent.
• Negative Production externalities - cost to 3rd party as a result of the actions of producers
• Negative production externalities

  
• Air pollutionResource depletion 

  Resource degradation 

  Deforestation 
• Social costs=Private costs+ Economic costs
• Marginal social costs>Marginal private costs
• firms are ignoring social cost, this means its firms produce at P1Q1 but  should me producing at P2Q2 price  is to low not accounting for Economic costs. Misallocation of resources 
• Positive production externalities - Benefits to 3rd party as a result of the actions of producers
• Positive production externality curve

  
• In work training 3rd party benefits R and D
• marginal social costs<marginal private costs
• social costs=Private costs+ economic costs
• self interest-firms only care about themselves. Firms produce at P1Q1 as but Should produce at P2Q2. Misallocation of resources 
• Negative consumption externality is the cost to a third party as a result of the actions of the consumers.

  Smoking

  Excessive alcohol

  Excessive sugary drinks

  Fast foods
• Marginal social benefits<Marginal private costs
• Social benefits= private benefits+ economic benefits
• Self interest is when consumers ignore social benefits producing at P1Q1 over production at P2Q2
• Negative consumption externality curve

  
• Positive consumption externalities is benefit to 3rd parties as a result of actions of a consumers.

  Healthcare

  Education

  Exercise

  Healthy eating
• Positive consumption externality curve

  
• Marginal social benefits>Marginal private benefits
• social benefits= private benefits+ economic benefits
• Self interest is when consumers are ignoring social benefits which means there is under consumption. Misallocation of resources.