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Public goods: goods that can be used by the general public, from which they will benefit.
Their consumption can’t be measured, and thus cannot be charged a price for (this is
why a market economy doesn’t produce them). Examples include street lights and
roads.
Merit goods: goods which create a positive effect on the society and ought to be
consumed more. Examples include schools and hospitals. The opposite is called
demerit goods which include alcohol and cigarettes.
External costs (negative externalities) are the negative impacts on society (third-parties)
due to production or consumption of goods and services. Example: the pollution from a
factory.
External benefits (positive externalities) are the positive impacts on society due to
production or consumption of goods and services. Example: better roads in a
neighbourhood due to the opening of a new business.
Private costs are the costs to the producer and consumer due to production and
consumption respectively. Example: the cost of production.
Private benefits are the benefits to the producer or consumer due to production and
consumption respectively. Example: the better immunity received by a consumer when
he receives a vaccine.
Social Costs = External costs + Private Costs
Social Benefits = External benefits + Private benefits
Market Failure
Market failure occurs when the price mechanism fails to allocate resources effectively.
This is the most disadvantageous aspect to the market economy. Causes of market
failure are: