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Market Failure (Public goods/Services (valued by society but have features…

- - - - Very difficult and/or costly to exclude non-payers from enjoying good/service
        
        Create free-rider problems whereby non-payers benefit without paying for it
        
        Consumers not willing to pay for the good
        
        No effective demand
        
        No revenue gained, thus profit motivated producers will be unwilling to supple any quantity as they would make a loss. Free market fails as DD and SS are non-existent. Eqm quantity is 0 and hence society suffers maximum welfare loss. #
    - - One additional consumer does not diminish the quantity available for other consumers
        
        Additional cost of providing for one more consumer is 0, MC=0
        
        Allocative efficiency occurs where P=MC, hence P=MC=0
  - - - Budget Constraint
        
        Government has to ensure that budget is allocated in the most cost-efficient method. They also have limited financial resources and need to allocate them efficiently amongst unlimited wants.
        
        Evaluation: Economies with budget deficit would face greater constraints as compared to economies with budget surplus.
      - Information Constraint
        
        Larger economies harder to obtain information
        
        Developing economies where data collection processes may not be as rigorous
      - Disadvantage: May encourage productive and/or dynamic inefficiency as governments is the sole provider in the market hence it does not need to compete with other firms. Will remove incentive for government to produce with the most cost-efficient method and to constantly improve on quality of good/service
- - - - MSC>MPC
      - WRITEUP:
        
        3) Assuming there are no negative externalities in consumption, MPB=MSB. With negative externalities in production, the MSC is higher than MPC, therefore.......
        
        4) In the free market, consumers and producers only consider their private costs and benefits, therefore the free market eqm is at xxx where MPB cuts MPC.
        
        2) Negative externalities are negative external costs borne by others in the society who are not directly involved in the production or consumption of .....
        
        5) However, allocative efficiency occurs at the socially optimal eqm, where MSB=MSC, such that socially optimal quantity is at xxx. This is because where MSB<MSC,there is a nett decrease in social welfare from ......
        
        1) .... results in partial market failure of over production
        
        6) Since Qm>Qs, there is overproduction of .... There will be deadweight loss at area xxxx, hence there is partial market failure.
      - Demerit goods: deemed socially undesirable by the government and which are over consumed when left to price mechanisms. Consumers fail to recognise full costs.
        
        WRITEUP:
    - - MPB>MSB
      - WRITEUP:
        
        3) Assuming there are no negative externalities in production, MPC=MSC. With negative externalities in consumption, MPB higher than MSB, therefore.....
        
        4) In the free market, self-interested producers and consumers only consider their private costs and benefits, therefore the free market eqm is at xxx where MPB cuts MPC.
        
        2) Negative externalities are negative external costs borne by others in the society who are not directly involved in the production and consumption of the.....
        
        5) However, allocative efficiency occurs at the socially optimal eqm, where MSB=MSC, such that the socially optimal quantity is at xxx. This is because where MSB<MSC, there is a nett decrease in social welfare from ....
        
        1) .... results in partial market failure of overconsumption
        
        6) Since Qm>Qs, there is overconsumption of .... There will be deadweight loss at area xxxx, hence there is partial market failure
  - - - MSB>MPB
      - WRITEUP:
        
        3) Assuming there are no positive externalities in production, MPC=MSC. Since there are positive externalities in consumption, MSB>MPB.
        
        4) In the free market, self-interested consumers and producers only consider their private costs and benefits, hence the free market eqm is at xxx where MPB cuts MPC.
        
        2) Positive externalities are.......
        
        5) However, allocative efficiency occurs at socially optimal eqm where MSB=MSC, such that socially optimal quantity is at xxx. This is because where MSB>MSC, the social welfare will continue to increase with more consumption, up to the last unit where MSB=MSC.
        
        1) .... results in partial market failure of underconsumption of ....
        
        6) Since Qm<Qs, there is underconsumption of... There will be deadweight loss at area xxxx, hence there is partial market failure.
    - - MPC>MSC
      - WRITEUP:
        
        4) In the free market, self-interested producers and consumers only consider their private costs and benefits which are..... hence the free market eqm is at xxx where MPB cuts MPC.
        
        5) However, allocative efficiency occurs at socially optimal eqm where MSB=MSC,such that socially optimal quantity is at xxx. This is because where MSB>MSC, the social welfare will continue to increase with higher production, up to the last unit where MSB=MSC.
        
        3) Assuming there is no positive externalities in consumption, MPB=MSB. With positive externalities in production, MPC>MSC.
        
        2) Positive externalities are ..........
        
        1) .... results in partial market failure of under production of ....
        
        6) Since Qm<Qs, there is under production of ... There will be deadweight loss at area xxxx, hence there is partial market failure.
    - - WRITEUP: similar to positive externalities in consumption.
        
        Talk about imperfect info where MPB perceived is below MPB actual....
    - - For underproduction
        
        Public education
        
        Basically, allows consumers to internalise external benefits and increase their MPB.
        
        Strength: Greater control over quantity
        
        Indirect subsidies
        
        Grants given to producers to cover part of cost production. Aims to tackle root cause of underproduction and underconsumption, which is positive externalities including merit goods. This is because in free market, producers and consumers only consider private costs and benefits, thus by giving indirect subsidies, producers and consumers internalise external benefits and encourage production/consumption of the good/service
      - For underconsumption
        
        Direct subsidies
        
        Encourage consumers to better afford to purchase goods and services with positive externalities in consumption
        
        Limited by: Budget constraint and information failure.
        
        Strength: Easy to implement
        
        Direct provision
        
        Regulation
        
        Government make it mandatory for producer to accurately publish certain information regarding the product/service.