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    Market Failure Exaplined

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    Market Failure Exaplined

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    Download as pptx, pdf, or txt
    1 views20 pages

    Market Failure Exaplined

    Uploaded by

    sofian ali

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
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    05

    Market Failures: Public Goods and


    Externalities

    McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
    Market Failures
    • Market fails to produce the right
    amount of the product
    • Resources may be
    • Over-allocated
    • Under-allocated

    LO1 5-
    Demand-Side Failures
    • Impossible to charge consumers
    what they are willing to pay for the
    product
    • Some can enjoy benefits without
    paying

    LO1 5-
    Supply-Side Failures

    • Occurs when a firm does not pay


    the full cost of producing its output
    • External costs of producing the
    good are not reflected in the supply

    LO1 5-
    Efficiently Functioning Markets

    • Demand curve must reflect the


    consumers full willingness to pay
    • Supply curve must reflect all the costs
    of production

    LO1 5-
    Consumer Surplus

    • Difference between what a consumer


    is willing to pay for a good and what
    the consumer actually pays
    • Extra benefit from paying less than
    the maximum price

    LO2 5-
    Consumer Surplus

    Consumer
    Surplus
    Equilibrium
    Price
    P1

    Q1

    LO2 5-
    Producer Surplus

    • Difference between the actual price a


    producer receives and the minimum
    price they would accept
    • Extra benefit from receiving a higher
    price

    LO2 5-
    Producer Surplus

    Producer S
    surplus

    P1
    Equilibrium
    price

    Q1

    LO2 5-
    Efficiency Revisited

    Consumer
    surplus
    S

    P1

    Producer D
    surplus

    Q1

    LO2 5-
    Efficiency Losses

    a Efficiency loss S
    from underproduction
    Price (per bag)

    d
    b

    D
    c
    Q2 Q1
    Quantity (bags)

    LO2 5-
    Efficiency Losses

    a S
    Efficiency loss
    from overproduction

    f
    Price (per bag)

    b
    g

    D
    c
    Q1 Q3
    Quantity (bags)

    LO2 5-
    Private Goods

    • Produced in the market by firms


    • Offered for sale
    • Characteristics
    • Rivalry
    • Excludability

    LO3 5-
    Public Goods

    • Provided by government
    • Offered for free
    • Characteristics
    • Nonrivalry
    • Nonexcludability
    • Free-rider problem

    LO3 5-
    Cost-Benefit Analysis
    • Cost
    • Resources diverted from private
    good production
    • Private goods that will not be
    produced
    • Benefit
    • The extra satisfaction from the
    output of more public goods

    LO3 5-
    Externalities

    • A cost or benefit accruing to a third


    party external to the transaction
    • Positive externalities
    • Too little is produced
    • Demand-side market failures
    • Negative externalities
    • Too much is produced
    • Supply side market failures
    LO4 5-
    Government Intervention
    • Correct negative externalities
    • Direct controls
    • Specific taxes
    • Correct positive externalities
    • Subsidies
    • Government provision

    LO4 5-
    Government Intervention

    P Negative P
    externalities St St
    b
    a a
    S S

    c T
    D D
    Overallocation
    0 0
    Qo Qe Q Qo Qe Q

    (a) (b)
    Negative externalities Correct externality with
    tax

    LO4 5-
    Government Intervention

    Methods for Dealing with Externalities

    Resource Allocation
    Problem Outcome Ways to Correct
    Negative externalities Overproduction of output 1. Private bargaining
    (spillover costs) and therefore 2. Liability rules and lawsuits
    overallocation of 3. Tax on producers
    resources 4. Direct controls
    5. Market for externality rights

    Positive externalities Underproduction of output 1. Private bargaining


    (spillover benefits) and therefore 2. Subsidy to consumers
    underallocation of 3. Subsidy to producers
    resources 4. Government provision

    LO4 5-
    Government’s Role in the
    Economy
    • Government can have a role in
    correcting externalities
    • Officials must correctly identify the
    existence and cause
    • Has to be done in the context of
    politics

    LO5 5-

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