Part 2: Market Failure + Govt Intervention in Market
How does Market Failure happen?
Presence of externalities
Presence of information failure
Market dominance (Later topic)
Immobility of FOP
Non provision of public goods
Types of market failure
Complete market failure
Partial market failure
Free markets cannot allocate scarce resources to consumers
Usually due to the lack of incentives for profit seeking companies to enter the market
Can allocate resources to some extent, but not at socially efficient output level
What is market failure?
When a free market is unable to allocate resources efficiently, and society's welfare is not maximised
What are Externalities?
A benefit of cost arising from the production/consumption of a good and service that falls onto a third party and was not taken into account by the producers/ consumers
Marginal Private Benefit (MPB): Additional benefit enjoyed by the individual/firm when producing/ consuming an additional unit of the good/service
Marginal External Benefit (MEB): Additional benefit enjoyed by third parties not involved in the economic transaction when producing/ consuming an additional unit of the good/service
Marginal External Cost (MEC): Additional cost borne by third parties not involved in the economic transaction when producing/ consuming an additional unit of the good/service
Marginal Private Cost (MPC): Additional cost incurred by the individual/firm when producing/ consuming an additional unit of the good/service
MSB= MPB+ MEB
MSC= MPC+ MEC