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TOPIC 9 : MARKET FAILURE (4 types of market externalities),…
TOPIC 9 : MARKET FAILURE
(4 types of market externalities)
positive externalities
of production
The production of good and service creates external benefits that are favourable for third parties
SOLUTION
subsidize the firms that offer training
provide vocational training through the state (setting up training centres)
printing firm provide training for its employee,
give benefit to new company
MPC > MSC
positive externalities
of consumption
merit goods (education, healthcare, sports facilities)
when consumed certain goods or services, it benefits the consumers and provide external benefits to third parties
SOLUTION
subsidize the supply
of the healthcare
+ve advertising to encourage the consumption of health care
pass laws insisting citizen to have regular health checks / vaccination
MSB > MPB
negative externalities
of consumption
when consumed certain goods or services, it affect the third parties
SOLUTION
government could impose indirect taxes on cigarettes
provide education about the danger of smoking / fund -ve advertising about cigarette
legislation / regulation
(to alter consumers' behavior)
demerit goods (cigarettes, alcohol, unhealthy foods)
MPB > MSB
negative externalities
of production
when the production of good or service creates external costs that are damaging to third parties.
SOLUTION
ban the polluting firms or restrict their output
government could issue tradable emission permits
government could tax the firm (carbon tax)
international agreements
a paint factory that emit fumes which are harmful to people in the area
MSC > MPC
overconsumption of demerit goods
under consumption of merit goods ;
demand decreases
under production ;
supple decreases
over production