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Market Failure

This document discusses market failures such as the lack of provision of public goods, externalities, unequal income and wealth distribution, and monopoly power. It defines externalities as costs or benefits experienced by third parties as a result of market transactions. Externalities can be positive or negative. Positive externalities provide public benefits from private actions while negative externalities impose public costs. The document includes graphs illustrating how externalities can lead to deadweight loss through over or underproduction relative to the socially optimal level.

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Betty Bavorová
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895 views2 pages

Market Failure

This document discusses market failures such as the lack of provision of public goods, externalities, unequal income and wealth distribution, and monopoly power. It defines externalities as costs or benefits experienced by third parties as a result of market transactions. Externalities can be positive or negative. Positive externalities provide public benefits from private actions while negative externalities impose public costs. The document includes graphs illustrating how externalities can lead to deadweight loss through over or underproduction relative to the socially optimal level.

Uploaded by

Betty Bavorová
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
  • Market Failure: Explains the circumstances under which markets fail, including the issues with public goods, externalities, and monopoly power related to efficiency and distribution.
  • Externalities: Describes externalities, their impact on third parties, and provides examples of both positive and negative externalities with visual graphs.

Market failure

How do markets fail?

lack of provision of public goods (vs. merit goods)


existence of externalities
inequality of income and wealth distribution
monopoly power concentrated into the hands of a few

Externalities
Externalities include benefits or costs for the third party, while the opposite is fully at the side of the
1st party. They are unintended outside influences of the market or business.
The classification of externalities is subjective (I might like the scent of flowers, but you might be
allergic).
Positive
Cost (private)
Benefit (private)
Benefit (public)

Negative
Cost (private)
Cost (public)
Benefit (private)

Producer

(http://sangecon.files.wordpress.com/2010/03/graph-111.png)

a factory (the dust)

(http://www.economicsonline.co.uk/Market%20failures%20graphs/Externalitiespositive-production.png)

someone having bees (they pollinate


the whole area)

Consumer

(http://tutor2u.net/economics/revision-notes/merit-goods-1.jpg)

girls wearing make-up

(http://12tamito.files.wordpress.com/2011/03/e382b9e382afe383aae383bce383b3e382b7e383a7e38383e38388efbc88201103-14-14-01-42efbc89.png)

smokers smoking

MSB Marginal Society Benefit


MPB Marginal Private Benefit
MPC Marginal Private Cost
MSC Marginal Society Cost
What do the triangles in the graphs mean? DWL dead weight loss:
what could be, but is not
o
o

positive externality
potential welfare gains
negative externality
welfare losses

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