Summary
Summary market failure
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Mamet FailureMarket failure :
Wherethltree market mechanism doesn't allocate resources efficiently
MPB Benetittotheindividualonly :
MSB : MPB -1
Marginal external benefit
MPC MSC : MPC
Benetittothetimonly
:
-1
marginal external cost
Externalities
Externalities Thetethat weren't directly involved inthetransactienbutarestiuattecled
.
_
Positive Externalities Of Consumption
* MPc=M"
positive externalities ocuwbecautethirdpartiesareignoredinthetransaction .
This
P* MPBANAMSB / resulting in social optimum
divergence betweenthe
-
causes a
- -
i curves
- -
p, -1 I
I# being higher than quantity CAD
- - - - - -
consumed .
This is because
1
,
,
I I MSB Therefore there is under consumption , causing awelfarelessintheshadedregion .
,
i ! MPB
Thiscautesthemarnettotailanatheretobealbcative inefficiency .
Qi Q* Q
Negative Externalities otconsumption
" MMM"
Negative externalities oaurbecautethirdpartiesareignoredinthetransaction .
This
causes a divergence betweenthe curves MPBANAMSB , resulting in quantity
P,
Cad being higher than /Q*)
- - - - -
-1
-
consumed social optimum this is because
,
-
p* - - - - - -
t i
l 1 Therefore there is over -
consumption , causing awelfarelessintheshadedregion .
1
I
i MPB
i MSB
Thiscautesthemaneettotailanatheretobealbcative inefficiency.
Q* Qi Q
Positive Externalities of Production
* MPC
positive externalities oaurbecautethirdpartiesareignoredinthetransaction .
This
Msc
cautesadivergencebetweenthecurvesmtlcanamsc resulting in social optimum ,
Pi
I# being higher than quantity 64)
- - - - -
-1
-
consumed - Thisisbecaute
,
p* -
- - - - -
- -
t
1
1
Therefore there is underproduction causing awelfarelessintheshadedregion .
,
i I MPB=mˢB
Thiscautesthemaneettotailanatheretobealbcative inefficiency .
Qi Q* Q
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