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Summary Market Failure
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Asymmetric Information + Solutions Public Goods + Private Goods Free-rider problem + solutions Externality DefinitionsAsymmetric Information: When one economic agent knows more Public Goods: Goods that are Non-Diminishable (consumption by one Every individual Free-rides on other individuals MPC: Marginal Private Cost = MC (S)
than another, which means it is difficult to determine an equilibrium doesn’t reduce what’s left for everyone else) and Non-Excludable willingness to pay + are rationally unwilling to pay as MPB: Marginal Private Benefit = MU (D)
price which would maximise welfare. (can’t exclude others from using them) they cannot be Excluded and the good is Non- MSB: Marginal Social Benefit = MPB + net external benefit
If left to the market: too much/too little would be consumed (the Public Goods Private Goods Diminishable MSC: Marginal Social Cost = MPC + net external cost
equilibrium will not be at the correct quantity/price from societies National Defence Water Problem: No-one will pay, output will be zero, no firm will Positive Externality in Consumption: When a good is
point of view) – will be a welfare loss Public Education Pens supply missing market, people will have to provide under consumed from societies point of view due to the
Solutions: Flood Defences Sandwiches good collectively benefits imposed on third parties because of consumption
Consumer protection law – right to refund, sales of Lighthouse decisions. (MSB greater than MPB)
goods Act Merit Good: Positive Externality in Consumption if
Regulations Standards, e.g. BS Arial fireworks display consumers do not have full information so will tend to
Consumer check service, e.g. check-a-trade under consume
Solutions:
Standards on information – labelling, advertising, Positive Externality in Production: When a good in under
fairtrade for example produced from societies point of view due to the benefits
Fund through collective means, e.g. taxes, donations,
(lower costs) imposed on third parties because of
crowd funding
production decisions
Provided through central body, e.g. govt, local councils,
Negative Externality in Consumption: When a good is
local interest group
over consumed from societies point of view due to the
costs imposed on third parties because of consumption
decisions. MSB less than MPB
Demerit Good: Negative Externality in Consumption if
consumers do not have the full information so will tend to
over consume
Negative Externality in Production: When a good is
overproduced from societies point of view due to the
costs imposed on third parties because of production
decisions
Common Goods, examples and solutions Positive Externality In Consumption Positive Externality in Consumption Solutions
Common Goods: Non-Excludable but diminishable
overconsumption Absence of private property rights, no
individual owns/controls resource
Examples: Wild flowers, hunting, rainforests, atmosphere: CO2
emissions, national parks
Solutions:
Only allow permitted use
Time of year/day
Max price
Managed stocks (minimum weight/gender) (govt
failure) – intervention makes things worse
Quotas (limit quantity but overfishing) (govt failure
– intervention makes things worse)
Advertising, e.g. healthy food communicate how
Assign Property Rights Not always possible
Beneficial it is to individuals/society as a whole
collectively manage (e.g. forestry commission,
environmental agency)
Examples:
Higher education
Check-ups (health)
Vaccinations
Electric cars
Metal straws
Healthy good
exercise
, BUT: Very difficult to match advertising to externality
What are the Private and External Costs and When will the Consumer pay most of the tax? When will the producer pay most of the Taxes Diagram
Benefits of Higher Education tax?
Private Costs External Costs
Tuition fees Opportunity cost -
Student Loan (lower equality
salary Studentification
Opportunity cost Taxes – tuition fees
Transport subsidised
Stress Opportunity – smaller
workforce, skills mismatch
Private Benefits External Benefits
Higher level of More skilled workforce
qualification cultural GDP growth –
capital technological advance
Greater career Research
opportunities, higher Jobs
salary/job satisfaction Higher salaries, future tax
Rite of passage earnings
Connections/networking
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