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Market Failure (Unit 14) - Coggle Diagram
Market Failure (Unit 14)
COSTS:
- Private costs
- costs of production and consumption ( costs of producing goods & price that consumer/gov. need to pay for goods & services)
- External costs
- negative spillover effects (side effects) of production/ consumption experienced (incurred) by third parties for which no compensation is paid
- EXAMPLE: a card driver caused air pollution & doesn't pay for it
- Social cost
- true cost of an economic activity
- external cost + private cost = social cost
BENEFITS:
- Private benefit
- benefits of production & consumption enjoyed by a firm, individual / gov.
- e.g. profit, utility (satisfaction)
- External benefit
- positive side effects of production or consumption experienced by third parties for which no money is paid by the beneficiary
- e.g. beauty of well-kept garden (neighbour enjoyed watching the beautiful garden), training (firm can reduce costs -> workers are well-trained), external benefits of education (workers becoming more skilled)
- Social benefit
- true benefits of consumption/ production
- external benefit + private benefit = social benefit
Definition:
- Public goods:
- goods that are non-excludable : those who do not pay can still enjoy access to the product
- goods that are non-rivalrous : no competition to purchase or use the product (everyone can use)
- E.g. street light, road signs, lighthouses, public toilet, etc.
- Merit goods:
- goods that considered to have social benefits yet are underprovided/ under-consumed without gov. intervention / provision
- consumption --> creates spillover effect for third party
- E.g. education, healthcare services, vaccination, museums public libraries, etc.
- Demerit goods:
- goods/ services which when produced/ consumed cause negative spillover effects in economy
- without gov. intervention, demerit goods will overproduced & over-consumed
- E.g. cigarettes, alcohol, junk food, etc.
Consequences (effects/result) of market failure:
- public goods may not be provided (not profitable)
- too few merit goods will be supplied & consumed
- demerit goods will be over-provided & over-consumed
- some firms may exploited (make use) their customers & employees (abuse of monopoly power)
- factor of immobility obstruct (get in the way) the ability of firms to allocate resources effectively
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