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Market Failure. Content. Externalities in Production and Consumption: Positive Negative Public goods Merit goods Demerit goods Market imperfections Inequalities in: Wealth distribution Income distribution. Externalities.

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Presentation Transcript
  • Externalities in Production and Consumption:
    • Positive
    • Negative
  • Public goods
  • Merit goods
  • Demerit goods
  • Market imperfections
  • Inequalities in:
    • Wealth distribution
    • Income distribution
  • Externalities result from differences between private and social costs or benefits
  • Externalities can be positive or negative:
    • Positive – these have beneficial effects on 3rd parties
    • Negative – these are costs that incurred by 3rd parties
external costs negative externalities
External Costs / Negative externalities
  • External costs created by businesses can impact the environment in the following ways:
  • Urban blight – excessive development and inappropriate developments mean the environment is visually less attractive, loss of farmland
  • Production and disposal of waste – this could include an increase in litter and rubbish from packaging
  • Use of energy
  • Pollution:
    • Noise – from cars, lorries, factories etc
    • Air – emissions from cars and delivery vehicles
    • Land
    • Sea
    • Water
negative externalities
Negative externalities
  • If you consider private costs then they would supply along supply curve S
  • Negative externalities mean that social costs are higher so the new supply curve should be S1 and equilibrium moved to P1
external benefits positive externalities
External Benefits / Positive externalities
  • As well as external costs businesses can create external benefits
  • External benefits are advantages a business brings to the local community when it locates its business in a particular area. These benefits will be positive for the local community.
  • Examples:
  • Employment
  • Quality of life
  • Providing a service
  • Regeneration of land
external benefits positive externalities7
External Benefits / Positive Externalities
  • If the business was supplying products ignoring social benefits the initial supply curve S1
external costs and benefits in production
External Costs and benefits In production
  • External costs are where MSC = MSB – MPC e.g. pollution, traffic congestion
  • External benefits are where MSC < MPC e.g. research and development in industry, human resource development
external costs and benefits in consumption
External costs and benefits in consumption
  • External costs = where MSB < MPB e.g. anti-social behaviour, passive smoking, noise
  • External benefits = where MSB > MPB e.g. public transport, vaccinations, attractive surroundings
  • The presence of negative externalities is likely to cause over production of a product
  • The presence of positive externalities is likely to lead to under production of a product
  • Externalities can lead to market failure if the pricing mechanism fails to account for the social costs and benefits of production
value of externalities
Value of Externalities
  • The value of social costs and benefits can be measured by looking at:
    • Consumer surplus
    • Producer surplus
    • Cost-benefit analysis : what is the balance of costs and benefits
    • Willingness to pay
cost benefit analysis
Cost Benefit Analysis
  • Identify all costs and benefits
  • Measure the value of all costs and benefits
  • Calculate the likelihood of costs and benefits
  • Analyse the timing of the costs and benefits looking at present value
  • Decide whether the project is worth undertaking
public goods
Public Goods
  • These are services that are provided by the government
  • Pure public goods have the following characteristics:
    • Non excludability – everyone can consume the goods whether they pay or not
    • Non rivalry in consumption – consumption by one person doesn’t reduce consumption for others
  • Examples – street lighting, national defence
public goods and market failure
Public goods and Market Failure
  • You cant get an individual to pay for public goods as others can get the benefits from consumption without paying
  • Private companies will not supply public goods as they don’t make an economic profit on them
  • Public goods are only supplied by the government and financed through taxation
private goods
Private goods
  • Private goods have the following characteristics:
    • Excludability – if you don’t pay you can be excluded from consuming the product
    • Rivalry – the consumption of one person reduces the amount available for others to consume
    • Rejectability – you can choose not to consume them and therefore reject them
merit goods
Merit goods
  • Merit goods are where social benefits exceed social costs – they generate positive externalities
  • Governments aim to provide more of these goods due to the benefits to society
  • They may subsidise the production of such goods reducing the marginal costs of consumption and therefore increasing demand
  • Examples – healthcare, education
merit goods and market failure
Merit goods and Market Failure
  • If the government didn’t step in and produce merit goods then they would be under produced
  • Attributable to the fact that individuals do not realise the benefits of consuming these goods
demerit goods
Demerit goods
  • Demerit goods are where social costs outweigh social benefits – they generate negative externalities
  • Governments try and reduce the consumption of these goods through higher taxes
  • Examples – cigarettes, alcohol
market imperfections
Market imperfections
  • Monopolies – these are often viewed as allocating resources inefficiently as the producer is able to charge higher prices due to being the only producer in the market
  • Imperfect knowledge of the market can also cause market failure
immobility of factors of production
Immobility of factors of production
  • These can lead to market failure and may be due to:
  • Occupational immobility – this occurs when there are barriers of mobility between different jobs and different industries
  • Geographical immobility exists when there are barriers to people of moving to different locations
  • In market economies an individuals ability to consume goods and services is dependent on their income / wealth
  • An uneven distribution of income / wealth within an economy can result in an unsatisfactory allocation of resources and therefore market failure
  • In many developing countries income inequality is great therefore resulting in misallocation of resources
  • Externalities are caused when social benefits / costs are different to private benefits / costs
  • Positive externalities occur where social benefits are greater than private benefits
  • Negative externalities occur where social costs are greater than private costs
  • Cost benefit analysis looks at the costs and benefits of producing / consuming a product
  • Public goods are goods that are provided by the government e.g. street lighting
  • Merit goods are where social benefits exceed social costs e.g. healthcare the government encourages people to use these
  • Demerit goods are where social costs exceed social benefits e.g. smoking the government discourages people to use these through taxation
  • Market imperfections can be caused by monopolies, imperfect market knowledge and factor immobility which can result in misallocation of resources
  • Inequalities in wealth and income distribution may result in a misallocation of resources as the rich consume more