MARKET

FAILURE
IB ECONOMICS
 MARKET FAILURE
Analyze the concept of market failure as a failure of the market to
1. achieve allocative efficiency, resulting in an over allocation or an under
allocation of resources

Describe the concepts of marginal private benefit and marginal social

2. benefit, marginal private cost and marginal social cost.

Describe the meaning of externalities as a the failure of the market to

3. achieve a social optimum where MSB=MSC.
WHAT IS PRICE
MECHANISM

RECAP
 SOCIALLY
OPTIMAL
EQUILIBRIUM

• Where marginal social cost

(MSC) meets marginal social
benefit (MSB).
• Community surplus is
maximum.
Source: https://www.youtube.com/watch?v=ljrBEdg-QU4&t=44s
FAST
FASHION
EXTERNALITY OR
NOT?
 FAST
FASHION:
EXTERNALITIE
S
Source: https://pearsonblog.campaignserver.co.uk/the-
economics-of-fast-fashion/
Source: https://www.upcyclerslab.com/blogs/upcyclers-lab-blog/problems-with-fast-fashion?utm_source=affiliate&utm_medium=direct&utm_campaign=affiliate_1062&utm_term=affiliatemarketing&ref=messold&utm_content=https://www.google.com/
CORRECTING
NEGATIVE
EXTERNALITY
OF
PRODUCITON
TAXES IMPACT OF TAX
• Government can choose to tax
the product that produces
externality.
• Shift MPC curve to the left.
• Raises price and reduces
quantity.
• Assessing the magnitude of
externality is extremely difficult
• Determining the appropriate tax
amount is a challenge
• Taxing the good may not deter
pollution, only reduce it.
LEGISLATION AND
REGULATION
• ENACT LAWS TO DETER PRODUCTION OF PRODUCTS
• EFFECT: REDUCE SPILLOVER, MOVE MPC CLOSER TO
MSC.
• To enforce regulations, government must create
OVERVIEW: an agency or office to monitor and enforce
compliance with the rules.

DRAWBACKS 1. Determining value of pollution is quite difficult

2. Disputes between governments and firms incur additional costs
3. Bans could eliminate externality with the opportunity cost of loss
to market benefit.
 The Kyoto Protocol in 1997 was the first major global
agreement to reduce greenhouse gas emissions amid
increasing evidence of climate change being caused by
human activities.
 NEGATIVE
EXTERNALITY
OF
CONSUMPTION
• Affects the demand
side as consumption
involves costs
• MSB are less than
benefits enjoyed by a
private consumer

• E.g. If you
incorporate all costs
of car consumption,
market would demand
less.
Externalities are spill-over effects from
production and/or consumption for which
no appropriate compensation is paid to
one or more third parties affected.
Externalities lie outside the initial market
transaction / and are not reflected in the
market price.
 SOLUTIONS
Negative consumption externality
Source: https://www.businesstoday.in/technology/news/story/ban-in-india-not-enough-tiktok-still-accessing-personal-data-of-indian-users-374516-2023-03-23#:~:text
=The%20Indian%20government%20banned%20TikTok,monthly%20active%20users%20in%20India.
 POTENTIAL SOLUTIONS
Legislation TAXATIO ADVERTIS PERSUASI
• Nudge theory:
• Ban certain
N
• Compel the market
ING
advertise negative
ON
• Shifts demand curve
products to pay for costs to to left
society. effects of the • Changing attitudes
• Difficult to ban
• Shift MPC to the product. through this can be
important services
left. • Combining legal expensive especially
to modern life.
• Shift towards the changes and in an age of
• More bureaucracy
optimum quantity activism would fragmented and
is required to
as a result of the change value that narrowaly cast media
enforce these laws
tax implemented consumer places message
on the good.
WHAT ARE COMMON POOL RESOURCES ?

• Natural resources such as fishing grounds and forests where it is difficult or very
expensive to exclude people from using them.

• Rivalrous in nature, in absence of effective management, these are inevitably

degraded.

• Here is a video about tragedy of the commons: https://www.youtube.com/watch?

v=CxC161GvMPc

• Free rider problem, everyone would try to catch as many fish as possible and ignore
the external costs.

In the absence of intervention, a profit seeking producer would not do this if others were
going to continue to reap the benefits.
BIGGEST
PROBLEM
Depletion of
resources
EXTERNALITY
CHALLENGE
Do you think this has created an externality?

Source: https://climateclock.world/
 ) ) ) ) ) ) ) ) ) Intro
) ) ) ) ) ) ) ) )

POSITIVE EXTERNALITIES

Production of certain goods creates

benefits to the third party.
• Gap between social cost and private cost.
• Marginal social cost is lower than private cost
• Society could enjoy benefits with more
production as the potential welfare gain.
 SOLUTIONS
• SUBSIDIES: actively encourage
extra production by a lumpsum
payment or a per unit payment. The
goal is to push the MPC curve
outwards. Opportunity cost,
political issues.

• STATE PROVISION: Government

needs to accurately predict the
needed areas of development, e.g.
training centers.
POSITIVE EXTERNALITY OF
CONSUMPTION
• Consumption of some goods can create benefits to third parties.
OVERVIEW:
• Social benefits of consumption exceed private benefits
• E.g.: Health care and education

MARKET • In a free market without intervention,

FAILURE
there will be underconsumption of
these goods, this causes market failure.
 WHY IS
INTERNATIONAL CO-
OPERATION
IMPORTANT ?
 BECAUSE...
• Threats to sustainability are global threats as they degrade common pool
resources including the atmosphere, oceans, deserts, forests and climate.
• Global nature of problem lies in the interdependence among countries and
emphasizes the need for co-operation.