Market failure and government failure

Market failure and government failure

1. Market failure:where the free market mechanism fails to achieve economic efficiency.

   • MPC=costs incurred by the firms/individual carrying out the action
   • MSC=includes cost of 3rd party (external) affected as a result of production and private costs
   • Private costs=benefit received by firm/individual carring out the action (consum/prod)
   • Social costs=rewards/gains to society as a whole of a particular action (include external and private)
   • Negative externalities:social costs>private costs. imposed by a 3rd party over and above costs directly paid by those carrying out the activity
     • how lead to mf= firms take pvt costs into account and dont account for externalities(overproduction)
       • if the externalities had taken into consideration, supply would <shift (as less being produced). too many scarce resources being used=productive effic

2. Positive externalities:social benefits>private benefits

   • how lead to mf=(underproduced by firms). underprod of these goods that create +ve ext as the extreme benefits arent taken into consideration
     • due to this, demand is lower than it should be and too few scarce resources are being used

3. Merit/demerit/public goods

   • Merit goods=have more private benefits and greater postive effect than consumers know
   • Demerit goods=more harmful goods than consumers realise, and they generate negative externalities
   • Public goods=have non excludability and non rivalry
     • why lead to mf=consumed collectively so impossible to charge people for their use. unlikely that freemarket would provide these goods
       • so underprovided even though they are required by consumers
   • Quasi goods=have some of characteristics of public goods

4. Methods of intervention(to correct market failure)

   • State provision (govt provide it)
     • +ve would correct the underprovision (supply)
     • -ve opportunity cost;could be spent elsewhere, doesnt guarantee increased consumption
   • Indirect taxes
     • +ve discourage overprod of demerit goods, increase govt revenue
     • -ve no affect if youre addicted, decreases AD, demerit-inelastic so not affected
   • Subsides
     • + undersupply of merit, incerased price level
     • -ve opportunity cost-money could be spend best elsewhere, depends on size/how its used, may also need a regulation in place
   • Regulations
     • +ve correct information failure, controls consumption of a particular good
     • -ve takes time, costly to regulate
   • Pollution permits
     • +ve reduces pollution, forces them to be more efficient
     • -ve costly, hard to regulate, get fined if go over (irreleveant/ineffective to MNCs
   • Provision of information
     • + correct info/assymetric failure, learn about merit/demerit goods
     • -ve time, hard to understand fully