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market failure - Coggle Diagram

- - - - producers will produce at MPB=MPC to maximise their profits
      - identify marginal external cost MPC in context. i.e. pollution, lower productivity
      - due to presence of external cost, there is divergence between MPC and MSC, where MSC=MPB+MEC, MSB=MPB+MEB
      - producers will produce at MPC=MPB but the socially optimal level is at MSB=MSC, thereby leading to overproduction + deadweight loss = allocative inefficiency
- - - - specific tax at the socially optimal level of output that approximate the value of MEC generated per unit of output
        
        benefits: removal of deadweight loss, firms have to internalise the external costs, hence, give incentives for firms to conduct R&D to reduce MEC and the tax amount they pay
        
        limitations: difficult to assess the exact amount of MEC as external cost tend to be intangible, Aadmi cost of collecting tax is high, regressive effect on lower income group
        
        how it works: increase firm's unit cost and shift Mac towards MPC+TAX which coincides with Qs. Qp reduced to Qs, solving the problem of over production as MSB=MSC --> allocative efficiency
      - tradable permits