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Market failure and externalities - Coggle Diagram
Market failure and externalities
Positive production externalities
external benefits created by producers, MSC < MPC
Negative consumption externalities
When negative externalities happened, the free market overallocates resources, Qm> Qopt and MSC >MSB
Demerit goods: undesirable for consumers but overprovided in market
Negative consumption externalities and overuse of common pool resources
Example: the overuse of clean air is the external cost that causes the marginal social benefit (MSB) less than MPB
def: external costs created by consumers
Policies to correct externalities
Market-based policies
Indirect tax - decrease in supply of demerit goods
Advantages
reduce consumption of demerit good
generate government tax revenue
Disadvantages
the difficulties to measure the effect
high indirect tax cannot be imposed
Government legislation and regulation
Education and awareness creation
Nudges
