Market failure

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  • 1. Market Failure
    Kanako Nakagawa
  • 2. Positive Externality
    Beneficial effects that are enjoyed by a third party when a good or service is produced or consumed
    Example: firm offering advanced driver training for their employees (to increase private benefit, and also have a spillover effect for society in improving safety on the roads.)
  • 3. Positive Externality of Consumption
    Positive externality
    MSC = MPC
    Price
    Figure 1: Positive Externalities of consumption
    Welfare gain
    P1
    P2
    MSB
    MPB
    0
    Q1
    Q2
    Quantity
  • 4. Positive Externality of Production
    MPC
    Positive externality
    Price
    MSC
    Figure 1: Positive Externalities of production
    P1
    Welfare gain
    P2
    MSB = MPB
    0
    Q1
    Q2
    Quantity
  • 5. Negative Externalities
    Bad effects that are suffered by a third party when a good or service is produced or consumed.
    Example: pollution, the effects of second-hand smoking.
  • 6. Negative Externality of Consumption
    Negative externality
    MSC = MPC
    Price
    Figure 1: Negative Externalities of consumption
    Welfare loss
    P2
    P1
    MPB
    MSB
    0
    Q2
    Q1
    Quantity
  • 7. Negative Externality of Production
    MSC
    Negative externality
    Price
    MPC
    Figure 1: Negative Externalities of production
    P2
    Welfare loss
    P1
    MSB = MPB
    0
    Q2
    Q1
    Quantity
  • 8. Public Goods
    Goods or services that would not be provided at all by the market.
    Have the characteristics of non-rivalry and non-diminish ability
    Example: flood barriers
  • 9. Merit Goods
    Goods or services considered as beneficial for people and that would be under-provided by the market and so under-consumed.
    Example: education and health care
  • 10. Demerit Goods
    Goods or services considered to be harmful to people and that would be over-provided by he market and so over-consumed.
    Example: cigarettes and alcohol