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    C Externalities

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    ikus8648
    The document discusses different types of market failures including externalities, public goods, information asymmetries, and speculation. It focuses on negative externalities of production, where social costs exceed private costs, and positive externalities of consumption, where social benefits exceed private benefits. Diagrams are used to illustrate how externalities can lead to market failures and result in either overproduction or underproduction compared to the socially optimal level.

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    C Externalities

    Uploaded by

    ikus8648
    27 views19 pages
    The document discusses different types of market failures including externalities, public goods, information asymmetries, and speculation. It focuses on negative externalities of production, where social costs exceed private costs, and positive externalities of consumption, where social benefits exceed private benefits. Diagrams are used to illustrate how externalities can lead to market failures and result in either overproduction or underproduction compared to the socially optimal level.

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    The document discusses different types of market failures including externalities, public goods, information asymmetries, and speculation. It focuses on negative externalities of production, where social costs exceed private costs, and positive externalities of consumption, where social benefits exceed private benefits. Diagrams are used to illustrate how externalities can lead to market failures and result in either overproduction or underproduction compared to the socially optimal level.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    27 views19 pages

    C Externalities

    Uploaded by

    ikus8648
    The document discusses different types of market failures including externalities, public goods, information asymmetries, and speculation. It focuses on negative externalities of production, where social costs exceed private costs, and positive externalities of consumption, where social benefits exceed private benefits. Diagrams are used to illustrate how externalities can lead to market failures and result in either overproduction or underproduction compared to the socially optimal level.

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    You are on page 1of 19

    Market Failure

    • It is a situation where the market fails to


    allocate resources efficiently.
    Examples of market failure

    Speculation
    Asymmetric
    and market Moral hazard
    information
    bubbles

    Under-
    provision of Externalities
    public goods
    Externalities
    Unit 15
    A type of market failure

    Cost or benefit that is spillover to 3rd party


    Externalities not reflected in the market price

    The decision (allocation of resources) does


    not take into account the full social cost and
    benefits of production and consumption
    Externalities

    In this topic, we will mainly focus on:

    NEGATIVE EXTERNALITIES POSITIVE EXTERNALITIES


    OF PRODUCTION OF CONSUMPTION
    Negative externalities of production
    Social
    Cost
    > Private
    Cost
    Positive externalities of consumption
    Social
    Benefits
    > Private
    Benefits
    Marginal Costs and Benefits
    Marginal Cost (MC, MPC, MSC)
    • The extra cost of producing an additional unit of output

    Marginal Benefit (MB, MPB, MSB)


    • The extra benefit of consuming an additional unit of output

    Welfare loss
    • Situations where marginal social benefit is not equal to marginal
    social cost and society does not achieve maximum utility
    Demand / MPB

    Benefits • The more consumption of hamburgers, the less value obtained

    • Therefore, the price you willing to pay for the hamburger decrease
    as you consume more of them

    D = MPB (marginal private benefit)

    Unit of hamburger
    0
    Supply / MPC

    Costs S = MPC (marginal private cost)

    • As businesses produce more hamburgers,


    the cost of production increases
    • Why?
    • Businesses start to pay more factor resources
    • Charging higher prices are necessary to cope with
    higher costs

    Unit of hamburger
    0
    Market equilibrium
    Costs/Benefits
    S = MPC Identify:
    Market equilibrium

    D = MPB

    Output
    0 Q1 Q2 Q3
    Negative Externality in Production
    Costs/Benefits
    MSC

    MPC = S

    Why would the MSC position


    above the MPC?

    Output
    0
    Negative Externality in Production
    Costs/Benefits
    MSC
    Identify:
    Market equilibrium
    MPC = S Optimal level of output
    B
    P2
    P1 A

    D = MPB = MSB (assume no external benefit)

    Output
    0 Q2 Q1
    Negative Externality in Production

    Costs/Benefits Welfare loss


    MSC

    Over-production of Q1-Q2
    MPC = S
    B
    P2
    P1 A

    D = MPB = MSB (assume no external benefit)

    Output
    0 Q2 Q1
    The diagram shows the market for the production
    of chemicals. Which one of the following can be
    deduced from the diagram?
    • A The social optimum quantity is Q1 and price is P1
    • B The market equilibrium quantity is Q2 and price is P2
    • C The welfare loss area is RTU
    • D The welfare loss area is RST
    Positive Externality in Consumption
    Costs/Benefits

    Why would the MSB position


    above the MPB?

    MSB

    MPB
    Output
    0
    Positive Externality in Consumption
    Costs/Benefits

    MPC =MSC (assume no external cost)

    Identify:
    Market equilibrium
    P2 Optimal level of output
    P1
    MSB

    MPB
    Output
    0 Q1 Q2
    Positive Externality in Consumption

    Costs/Benefits

    MPC =MSC (assume no external cost)

    Welfare loss
    P2
    P1
    MSB
    Under-consumption of Q2-Q1

    MPB
    0 Q1 Q2 Output
    The diagram shows the market for vaccinations
    against measles. Which one of the following can
    be deduced from the diagram?
    • A The social optimum output is Q1
    • B The market equilibrium output is Q2
    • C Welfare gain is shown by the area BCE
    • D Welfare gain is shown by the area ABC

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