| What is a Market Failure? | -This is when the Price Mechanism - Supply and Demand Forces - leads to a Failure to Allocate Resources Efficiently, and Society gets Disadvantaged.
-When the Price Mechanism leads to a Unsatisfactory Outcome |
| What is a Complete Market Failure.
-Give an Example using National Defence | -This is when no Market Exists. Simple
-National Defence is such an Example as no Markets will Allocate National Defence, meaning Governments must Intervene |
| What is a Partial Market Failure
-Give an Example using Healthcare | -The Market Functions, but the Price or Quantity Supplied of the Goods is Wrong.
-Healthcare, if its up to Supply and Demand Forces, would be Partial Failure, as some People wouldn't be able to Afford the Treatment they Need. Governments may Intervene and make Health Care Free. |
| What is an Externality? | -Effect that Producers or Consumers of a Commodity has on People who have Naught to do with the Making or Consumption of the Good. They are called Third Parties
-Can be Positive - External Benefits to Third Parties, or Negative - Externals Costs to a Third Party.
-Can come from both Production [Making Steel can Harm the Environment] or Consumption [Someone Training to be a Doctor] [They are 'Consuming' the Training] |
| What is the:
1. Private Cost
2. External Cost
3. Social Cost | 1. Private Cost is just the Cost of Doing Something to a Consumer or Firm. Cost a Firm Pays to make a Good is its Private Cost - Price Consumer pays to Buy the Good is their Private Cost
2. External Cost is caused by Externalities. Drop your Gum and the Council may Employ someone to Pick the Litter up.
3. Social Cost is Private Cost + External Cost. Full Cost that is Borne by Society. |
| What is the:
1. Private Benefit
2. External Benefit
3. Social Benefit | 1. Private Benefit is the Benefit gained by Consumer or Firm by doing Something. Consumer's Private Benefit from a Skiing Holiday is the Enjoyment
2. External Benefits is caused by Externalities. Better Technology leads to Less Electricity being Used, Positively Impacting the Climate
3. Private Benefit + External Benefit = Social Benefit. What Society overall Achieves from the Goods |
| How does Market Failure Happen then? | -The Price Mechanism in a Free Market will only Factor the Private Costs & Benefits, but not External Cost & Benefit
-This gives a Skewed Social Benefit that isn't True, hence, an Unsatisfactory Outcome - Market Failure. |
| How can a Production Externalities be shown on a Diagram and say where the Lines would be for Negative and Positive | -Y Axis = Price, Costs, Benefits. X Axis = Quantity
-One line will be the Marginal Private Cost [MPC] - Cost of Producing the Last Unit of Food
-Another line be the Marginal Social Cost [MSC] - MPS + The External Outcome
-Difference between MPC & MSC is the External Cost of Production.
-If the MSC is Higher than the MPC, its Negative. If the MSC is Lower than the MPC, its Higher. |
| Describe, using Pollution as an Example, why, in a Negative [Or Positive] Production Externality Graph, may the Lines Diverge? | -If the Lines Diverge then the External Costs per Unit gets Larger and Larger as Output Increases
-Pollution may explain 1 Reason why - External Costs per Units created via Pollution may Increase as Output [More Pollution] Increases |
| How can a Consumption Externalities be shown on a Diagram and say where the Lines would be for Negative and Positive | -Same X and Y Axis as the Production Externality Graph
-Marginal Private Benefit [MPB] will be One Line - Shows the Benefit of Consuming the Last Unit of Good
-Marginal Social Benefit [MSB] will be another Line - Shows the MPB and External Outcome
-Difference between MPB and MSB is the External Benefit
-If the MPB is Higher than the MSB, its Negative. If MPB is Lower than the MSB, its Positive |
| Describe, using Vaccinations as an Example, why, in a Positive [Or Negative] Consumptions Externality Graph, may the Lines Diverge? | -If MPB and MSB Diverge then the External Benefit per Unit will get Larger and Larger as Outcome Expands
-Vaccination can be 1 Reason why. More People that are Vaccinated, More Protection for the Unvaccinated. |
| How can you show that the Equilibrium Point in a Market is NOT the Socially Optimal Point? | -Since Supply and Demand only Factors the Private Cost and Benefit, we can Replace Supply with MPC and Demand with MPB
-The Equilibrium Point then would be where MPC and MPB meet
-The Socially Optimal Point would be then where the MSC and MSB meet, so, Including them in the Diagram creates their own Price and Quantity that can be More or Less.
-The Socially Optimal Point would cover the Maximum Benefit of Positive Externalities and Cover the Cost of Negative Externalities. |
| How can Overproduction come due to Ignoring Negative Production Externalities? | -Simplistic Sake, MPB = MSB. But MSC and MPC are Different Lines, so have their Own Intersections with MPB [MSB too]
-This creates their own Quantity at the Given Price Level
-Negative Production Externalities will have the MSC Higher than the MPC, so therefore, MSC will have a Lower Quantity than MPC
-Therefore, an Overproduction of MPC Quantity X = MSC Quantity Y will Occur. [And at Lower Price too] |
| What would the Welfare Loss be due to Ignoring Negative Production Externalities? | -Welfare Loss is the Loss to Society by Ignoring Externalities
-For this case, The Welfare Loss would be a Tringle, with its Points being:
-A: Equilibrium Point [Free Market]
-B: Point on MSC that is Directly above the Equilibrium Point [A] [The External Cost]
-C: Socially Optimal Point |
| How can Under Consumption come due to Ignoring Positive Consumption Externalities?
-What is the Welfare Gain | -Let MPC = MSC. But MPB have Different Line to MSB
-Socially Optimal Point is when MSB = MSC. [Point A]
-Free Market Point will be when MPB = MPC [Point B]
-There is an Under Consumption as MSB is further Right than MPB, and the Price is Lower than what Society wants
-Welfare Gain [Gain to Society LOST by ignoring Externality] will be Point A, Point B, and the External Benefit |
| Explain how Education has a Positive Consumption Externality? [And why it is Ignored by the Free Market & Some Parents] | -Free Markets will Ignore by the Supplier as they care for Profit Maximisation, and Parents may only see the Benefit to only Themselves or Their Children. [And therefore there would be a Potential Welfare Gain lost to Society]
-Really, more Educated workforce leads to more Productive and helps out anti-social behaviour, like Crime. |
| Explain how Healthcare has a Positive Consumption Externality? | -Healthier Workforce leads to more Productive Workforce leading to better Economy Performance.
-Social Benefits too as better Personal Well-Being and Life Expectancy increases. |
| How can Overconsumption come due to Ignoring Negative Consumption Externalities? What is the Welfare Loss? | -Let MPC be MSC. But have MPB and MSB different Lines
-MPB would be Higher than MSB here, meaning that the Quantity would be Overconsumed and the Price would be too High to that of Society's Demands. This means MPB will Intersect with MPC at Point A, and MSB will Intersect with MSC at Point B.
-This means the Welfare Loss will be Point A, Point B and the External Benefit. |
| How can Underproduction come due to Ignoring Positive Production Externalities? What is the Welfare Gain? | -Let MPB = MSB. But MPC be higher than MSC. This means that the MPC will be Underproduced when compared to MSC as there is Less Quantity, at a Higher Price.
-So therefore wherever MPC intersects is Point A, and MSC intersects is Point B.
-The Welfare Gain is Point A, Point B, External Cost. |
| How can a Lack of Property Rights result in Market Failure? How can we not allow that?
[Regulation] | -Absence can lead to Negative Production and Consumption Externality Externalities, and therefore Market Failure. A Factory may emit Wastes to the Water, and wouldn't be Accountable if the River didn't have Property Rights
-Giving Property Rights ensures that the Externalities are Accounted - Fined, Charged even Arrested. |
