Market Failure + Externalities

Market Failure + Externalities

1. Complete

   • missing markets

2. Partial

   • produces wrong quantity
   • wrong pricing

3. Causes of Market Failure

   • neg. externality
     • MSC exceeds MPC
   • pos. externalities
     • MSB exceeds MPB
   • Imperfect information
     • merit goods underproduced
     • demerit goods over-produced
   • market dominance by monopoly
     • leads to under-production and high prices
   • Factor immobility
     • causes unemployment
     • lower productive efficiency

4. Externalities

   • third party effects
   • occur outside market
     • i.e. people not directly involved in production or consumption
   • Positive
     • MSB > MPB
     • good underproduced
   • Negative
     • MSC > MPC
       • leads to overproduction
     • smoking
     • litter
     • food waste
     • pollution
       • impact on health