Market failure

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Market failure

  1. 1. Market Failure 1
  2. 2. MARKET FAILURE• Market failure means that themarket mechanism does not achievedesirable results.• Sources of market failure include lack of competition (monopoly),externalities, public goods, and incomeinequality.• Although controversial, government intervention is a possible way tocorrect market failure. 2
  3. 3. P200 Monopoly and deadweight loss175150 MC (S)125100 75 50 25 MR D 1 2 3 4 5 6 Q 3
  4. 4. EXTERNALITIES~ An externality is a cost or benefit of a good imposedon people who are not buyers or sellers of that good.~ Negative externality – external cost imposed to thirdparties. E.g. Pollution, (too many resources are used toproduce the product responsible for the pollution) –result in overproduction and underpricing.~ Positive externality – external benefits enjoyed bythird parties. E.g. vaccination (too little resources areallocated for the product) – result in underproductionand underpricing.~ Two basic approaches to solve this market failure aretaxes (like in pollution taxes) and regulation (like invaccinations). 4
  5. 5. External Cost of PollutionIncludes external costs of pollution P2 S2 S1 P1 DExcludes external costs of pollution Q2 Q1 5
  6. 6. External Benefits of AIDS Vaccinations Includes Vaccination benefits SP2P1 D2 Excludes Vaccination benefits D1 Q1 Q2 6
  7. 7. PUBLIC GOODS• Public goods are goods that are consumed byeveryone regardless of whether they pay or not.• Two properties of a public good: 1) Non-exclusive; 2) Non-exhaustive• e.g National defense, air traffic control, andother public goods can benefit manyindividuals simultaneously and are provided bythe government. 7
  8. 8. Private goods vs. Public goods• Consumption: •Private good – only payers can consume •Public good – nonpayers can still consume• Supply – both production involve money cost andopportunity cost •Private good – production is profitable (supplied by private firms) •Public good – production not profitable (provided by the govt or produced collectively) 8

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