Definition:

Market failure:
when the production and consumption of goods and services causes positive
or negative side-effects to a third party not directly involved in the market of
that good or service.
Private cost:
any cost that a person or firm pays in order to buy or produce goods and
services

External cost:
a cost not included in the market price of the goods and services
being produced

Social cost:
the sum of the private costs resulting from a transaction and the costs
imposed on the consumers as a consequence of being exposed to the
transaction for which they are not compensated or charged.
Example of market failure (caused by free market):
- Shortages of essential public goods or services such as public schools
or public hospitals.

- Surpluses of demerit goods or services such as cigarettes, drugs,

alcohol or gambling.

- Education and healthcare may only be available to consumers who

have the ability to pay for the services.

-State infrastructure such as street lighting, public parks and roads may
be underprovided, as nobody can be excluded from using these
services. Private businesses may not be interested in providing these
services as they do not generate maximum revenues and profits.

-An overuse of natural resources such as oil, coal and wood, which can
cause damage to the environment.
Example of private cost:

costs of manufacturing, production, sale, advertising

Example of external cost:

when people buy fuel for a car, they pay for the production of that fuel

Formula of social cost:

private cost+external cost=social cost

Definition:

Private benefit:
the benefit derived by an individual or firm directly involved in a
transaction as either buyer or seller.

External benefit:
a benefit not included in the market price of the goods and
services being produced

Social benefit:
the positive effects that a particular product or service can have
on society as a whole.
Example of private benefit:

if you purchase a subscription to a film streaming service,

and you invite your friends around to watch a film with you

Example of external benefit:

Text
education. When someone is educated, they are more likely to
be productive members of society. This productivity benefits not
only the individual, but also society as a whole.

Formula of social benefit:

private benefit+external benefit=social benefit

Definition:

Public goods:
is a product which is non-rival and non-excludable and hence needs
to be financed by taxation

Merit goods:
Products which the government considers consumers do not fully
appreciate how beneficial they are and so which will be under-consumed
if left to market forces. Such goods generate positive externalities.
Demerit goods:
Products which the government considers consumers do not fully
appreciate how harmful they are and so which will be over-consumed if
left to market forces. Such goods generate negative externalities.
Examples of public goods:

They are non-rejectable. It is not possible for people to reject their

services of the police, for example.

The cost of supplying a public good to one more consumer if often

zero. Defending one more person in the country will be unlikely to
cost the army anything.

Example of merit goods:

Healthcare, education, fire protection

Examples of demerit goods:

Alcohol, drugs, tobacco

Explain what does it mean by “non-excludable” and “non rivalrous”

Nonexcludable means that it is costly or impossible for one user to

exclude others from using a good.Nonrivalrous means that when
one person uses a good, it does not prevent others from using it.

Causes and consequences of market failure (KOGNITY):

Underconsumption of merit goods (explain-kognity):

Merit goods offer private benefits but also benefit society as

they cannot be carriers of diseases. Recognizing these
benefits would increase demand for merit goods. External
benefits are often not recognized by consumers and are highly
influenced by product price and availability. This results in a
price elasticity of demand for merit goods, with governments
often intervening to influence resource allocation. Higher
external benefits increase government intervention in these
markets.
Overconsumption of demerit goods (explain-kognity):

Demerit goods' addictive nature leads to price inelastic

demand, allowing firms to raise prices and increase
demand. This creates high incentives for supplying banned
substances, leading to increased risk. Without government
intervention, market failure would increase, but managing
resource allocation can reduce external costs. Government
intervention is essential to decrease external costs from
demerit goods consumption.

Other cause of market failure (explain briefly - textbook)

Abuse of monopoly power:

A monopoly is a dominant firm in the market, controlling prices and

output. This leads to market failure as it lacks competition, resulting in
higher prices for goods and services. Governments can combat
monopolies by promoting competition, increasing consumer choice,
and reducing prices to achieve efficiency in resource production and
Factor immobility: allocation.
Factor mobility is crucial in production to efficiently allocate resources,
shifting production from less demand to high demand. Geographical and
occupational mobility is essential. Labor and capital immobility can arise
from industry relocations, family commitments, and costs for research
and development.