Notesale: Turn your study into money

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Micro notes - Market Failure
● Market failure ​= when the price mechanism leads to an inefficient allocation
of resources, leading to a net welfare loss
...

● Complete market failure occurs when, unless the good or service is publicly
provided, it would not be provided at all (e
...
military)
...
g
...

Externalities
● Externalities ​= the third party costs or benefits which affect someone who
was not involved in the transaction
...
g
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● External benefits = positive externalities
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● Private costs ​= costs that are internal to a transaction, so affect me or the
firm (taken into account by the price mechanism)
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● External benefits ​= positive third party effects outside a transaction (e
...

vaccinating someone against measles reduces the possibility of others
catching measles)
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● Social benefits ​= external benefits + private benefits
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● By ignoring the external benefits of production and consumption, this can lead
to: underproduction, underpricing, potential welfare gain and long-term
consequences of underproduction (e
...
lack of education = low skilled future
workforce = low productivity)
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● Marginal private benefit (MPB) is drawn as
a “demand curve” (but ​don't ​say that in
the exam)
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● We only need to know the negative externalities of ​production ​graph
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The bit that’s
shaded in blue is the welfare loss
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This can only be corrected through government
intervention
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This graph (left) shows the
difference between MPB and
MSB
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It shows that from Q3 to Q4
there is an underconsumption
of cars
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The vertical line
DF represents the value of the
external benefit
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● NOTE: these graphs assume that consumers are rational and that
demand and supply are both consistent
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A paper and glass
recycling plant reduces
the waste that goes to
landfill, using wind
turbines reduces the
emissions from fossil
fuels and construction of
a new university attracts
more students
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of your garden increases
the value of neighbouring
properties and the
consumption of vaccines
leads to herd immunity
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● This means that…
➔ You cannot stop others from benefiting from them (non-excludability)
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● Street lights, defence and refuse collection are all examples of pure public
goods
...
g
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● Education and healthcare are not public goods - they are better described as
merit goods ​(which have external benefits to society)
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● This leads to market failure because it is impossible to withhold the good from
consumers who refuse to pay for it
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● This means that the government has to provide public goods, but in doing so
they have to guess their marginal social benefit (which may be inaccurate)
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● Rational people never want to contribute towards the payment of public
goods, hence why we have taxes
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Imperfect information can lead to an overconsumption of demerit goods and an
underconsumption of merit goods (because people are not aware of their
costs/benefits)
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Asymmetric information ​= where consumers and producers have unequal access
to information about a good or service in the market (e
...
“lemon markets” emerge,
such as in the market for used cars where producers have more knowledge about
their condition than consumers)
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