Market Failure 1

Market Failure - Externalities - Spill Over 

Market Failure: When market forces (demand and supply) alone fail to allocate scarce resources efficiently, either that to much or not enough of a good is produced or consumed.

Externality - When an economic activity creates benefits or imposes costs for third parties for which these do not pay for, or do not get compensated for, respectively.

4 Types:

• Externalities - Positive & Negative Production, Positive & Negative Consumption
• Public Goods
• Monopoly Power - (more when get to monopoly, proper)
• Asymmetric Information

Externalities

mjmfoodie: Market Failure

mjmfoodie: Externalities

Externalities - When is a Potato chip not just a potato chip - Video

An externality leads to a market failure as either more or less than the socially optimal amount is produced or consumed. Market forces alone fail to lead to an efficient resource allocation.

Externalities may arise in the production process, where they are known as production externalities, or in the consumption process, in which they are known as consumption externalities. If the impose costs on third parties they are considered negative externalities. In contrast, if they create benefits they are considered positive externalities.

Production = Costs = Supply = MPC & MSC  (Remember this)

MPC - Marginal Private Costs: defined as the costs of producing an extra unit of output. Include, wages costs of raw materials and other costs that the firm takes into consideration in its decision making process to produce. It follows that the supply curve reflects the MPC of a competitive firm.

MSC - Marginal Social Costs: defined as the costs of producing an extra unit of output that are borne by society. They reflect the value of all resources that are sacrificed in the specific production process. This means that they include not just the labour and other resources that are sacrificed, the costs of which are taken into consideration by the firm, but also include any (External Costs) that are not considered by the the firms, like pollution.

Consumption  = Benefits = Demand = MPB & MSB (Remember this)

MPB - Marginal Private Benefits: defined as the benefits the individual enjoys from the consumption of an extra unit of the good. The willingness of consumers to pay for an extra unit is determined by the extra benefit he enjoys from consuming that extra unit. The demand curve reflects the MPB enjoyed from consuming extra units of a good.

MSB - Marginal Social Benefits: benefits that society enjoys from each extra unit consumed. MSB includes the private benefits enjoyed by the individual but in addition any benefits others may enjoy as a result (External Benefits).

Reffonomics - Great website - Reffonomics
http://www.reffonomics.com/TRB/INPROGRESS/Microeconomicsindex1Externalities.html