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Section 4 - Market Failure II - Coggle Diagram
Section 4 - Market Failure II
Ignoring externalities
Negative production
Leads to overconsumption
Goods with negative production externalities have a higher social cost than the private cost
If external cost was taken into account, less would be supplied at every price leel, and the supply curve would shift left
Equilibrium price would be higher and output would be lower
More is produced and sold than is desirable for society
Positive production
Leads to underproduction
Goods with positive production externalities have a higher private cost than social cost
More be supplied at each price, supply curve would shift right
Equilibrium price would be lower and output higher
Negative consumption
Leads to overconsumption
Goods with negative consumption externalities have a higher private benefit of consumption than social benefit
Less should be consumed at each price - demand curve would shift left
More is consumed than is desriable for society
Positive consumption
Leads to underconsumption
Goods with positive consumption externalities have a higher social benefit than private benefit
If the external benefit was taken into account, more would be demanded at each price level, the demand curve would shift right
Less is consumed than is desirable for society
Imperfect information
Symmetric information
Everyone has equal and perfect knowledge
Allows the efficient allocation of resources
Asymmetric information
Lack of perfect information
Sellers often have more information on a product than buyers
Market failure
Means that merit goods are underconsumed and demerit goods are overconsumed
Consumption
Consumers may not know the full personal benefit of a merit good
Consumers may not know how harmful a demerit good is
Inequality
Inequility can be caused by difference in wages/ regressive taxes
Inequality leads to differences in access to resources - it affects the ability of individual to consume goods/ services
Redistribtuion of income could lead to an allocation of resources which is beneficial to society
Government intervention
Introducr progressive taxes
Could reduce incentives for individuals and firms to work hard
Immobile factors of production
Immobile
FOP that can't easily be moved to another area of the eoconomy
Land is immobile, capital is mobile
Geographical
Large house prices and high rents make it hard for workers to move location
Reluctance to leave family
Obstacles which prevent the FOPs moving between areas
Occupational
Lack of skills to do a different job
Obstacles which prevent the FOPs changinge their use
Reducing market failure
Reduce geographic immobility - Governments can offer relocation subsidies/ mortgage relief to make moving to a particula area more affordable
Reduce occupation immobility - Governments could provide more training to increase people's skill