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Failure3
- 2. Write about a time when you failed at something. What caused the failure?
- 3. Take out your commentary and the rubric. Grade yourself.
- 4. Talk with people in your group and try to come up with a variety of products we consume and what their negative externalities are. Write them down in your notebook.
- 5. What would a successful market look like? What would a failed market look like?
- 6. What do you think causes markets to fail?
- 7. Market Failure Market failure occurs when there is an inefficient allocation of resources in a free market.
- 14. External Costs Price Quantity Bought and Sold MSB MPC £5 100 MSC = MPC + External Cost £12 £7 80 Socially efficient output is where MSC = MSB The Marginal Social Benefit curve (MSB) represents the sum of the benefits to consumers in society as a whole – the private and social benefits. The Marginal Private Cost (MPC) curve represents the costs to suppliers of producing a given output. The MPC does not take into account the cost to society of production. At an output level of 100, the private cost to the supplier is £5 per unit but the cost to society is higher than this (£12). The true cost therefore is the MSC (the MPC plus the external cost). Current output levels therefore (100) represent some element of market failure – price does not accurately reflect the true cost of production. The difference between the value of the MSB and the MSC represents the welfare loss to society of 100 units being produced.
- 15. External Benefits Price Quantity Bought and Sold MPB MSC £5 100 Socially efficient output is where MSC = MSB MSB £10 £6.50 140 There can be a position where output is less than would be socially desirable (education for example?) In this case, the sum of the benefits to society is greater than the private benefit to the individual.
Editor's Notes
- The slide has been designed to try to lead students through the distinction between the private costs of production and the social cost. The diagram starts out with a basic supply and demand position with price at £5 and Quantity at 100. The demand curve has been labelled MSB – a brief explanation of the concept here is useful. The supply curve is the marginal private cost – the cost to the producer. To try to link the theory to the practice it is suggested that the item in question is the production of rolls of Clingfilm! The reason is that in producing cellophane products there is an amount of air pollution. If students are told that the cost to the producer of manufacturing 100 rolls of Clingfilm is £5 (don’t forget to remind them that this figure includes the element of profit they make) but, the company do not take into consideration the cost imposed on society of the pollution they cause. This cost is then highlighted by a dashed line moving up from the bottom and is priced at £12 . The supply curve that considers the true cost (the MPC and MSC) is then drawn in and the right brace appears to indicate the extent of the social cost (£7). The welfare loss triangle is then imposed – this may need to be explained and students could be reminded of the work done on consumer surplus to help reinforce the concept of the ‘value’ here. Finally, the socially efficient output is highlighted; students can be told that there would be benefits to society if less were produced but that we would be paying more as a result!
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