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Section 4 - Market failure I - Coggle Diagram
Section 4 - Market failure I
Goods
Public goods
Non exludability - people cannot be stopped consuming the good even if they haven't for it
Non rivalry - one person benefitting from the good doesn't stop others also benefitting
People who don't pay for the good still receive benefits from it, in the same way that people who pay for it do, so there is no profit from it as people don't see reason to pay for the good
Private goods
Exludable - someone can be prevented from consuming it
Rivalrous - One person benefitting from the good does stop someone else from benefitting
Quasi public goods
Characteristics of both public/ private goods
Partially provided by the free market
Externalities
Positive externality - external benefits to a third party
Negative externality - external costs to a third party
Production
Positive - producing military equipment could lead to an impovement in technology that benefits society
Negative - producing steel could lead to pollution which harms the local environment
Consumption
Positive - Someone training to be a doctor will benefit patients the doctor treats, (consumption of training)
Negative - consuming a chocolate bar could lead to littlering
Market failure
Private cost - cost of doing something
Market failure ocurs because externalities are ignored
Private cost + external cost = social cost (full cost borne by society of a good/ service
Private benefit - benefit gained for doing something
Private benefit + external benefit = social benefit
Market failure happens when price mechanism only takes into accound private costs and benefits, and not external ones
Diagrams
Negative
If the lines diverge, then external costs increase with unit output, like with pollution
If MPC and MPS are parallel, then external cost per unit produced is constant
Positive
Parallel curves mean the positive externality is constant, diverging curves mean external benefit increases with output
Vaccination is an example, the more vaccinated people, greater the protection
Effects that producing or consuming a good/ service has on people who aren't involved in the making, buying/ selling and consumption of it
Merit goods
Goods whose consumption is beneficial to society, they provide benefits to individuals and society
Underconsumed
Free markets ignore positive externalities
Imperfect information means the benefits aren't always realised
Production and consumption will be below the socially optimal level
Positive externalities
If left to the free market to decide price, market equilibrium is below the social optimal level of consumption
Potential welfare gain is lost
To increase consumption to the socially optimal levle, the government could subsidy to bring the price down
Greater social benefits than private benefits
Demerit goods
Greater social cost than private costs
Goods whose consumption is harmful to people that consume it
Overconsumed
Free market ignores negative externalities
Production and consumption will be above the socially optimal level
Imperfect information means consumers don't always realised the harm demerit goods cause
Cause negative externalities
People are usually unaware or don't care about harm they cause