Summary market failure

Mamet Failure
Market failure :
Wherethltree market mechanism doesn't allocate resources efficiently
MPB Benetittotheindividualonly :
MSB : MPB -1
Marginal external benefit
MPC MSC : MPC
Benetittothetimonly
:
-1
marginal external cost

Externalities

Externalities Thetethat weren't directly involved inthetransactienbutarestiuattecled
.
_




Positive Externalities Of Consumption
* MPc=M"
positive externalities ocuwbecautethirdpartiesareignoredinthetransaction .
This

P* MPBANAMSB / resulting in social optimum
divergence betweenthe
-

causes a
- -




i curves
- -




p, -1 I
I# being higher than quantity CAD
- - - - - -




consumed .
This is because
1
,
,

I I MSB Therefore there is under consumption , causing awelfarelessintheshadedregion .


,


i ! MPB
Thiscautesthemarnettotailanatheretobealbcative inefficiency .




Qi Q* Q



Negative Externalities otconsumption
" MMM"
Negative externalities oaurbecautethirdpartiesareignoredinthetransaction .
This

causes a divergence betweenthe curves MPBANAMSB , resulting in quantity
P,
Cad being higher than /Q*)
- - - - -

-1
-




consumed social optimum this is because
,
-




p* - - - - - -

t i

l 1 Therefore there is over -


consumption , causing awelfarelessintheshadedregion .


1
I

i MPB
i MSB
Thiscautesthemaneettotailanatheretobealbcative inefficiency.




Q* Qi Q


Positive Externalities of Production
* MPC
positive externalities oaurbecautethirdpartiesareignoredinthetransaction .
This

Msc
cautesadivergencebetweenthecurvesmtlcanamsc resulting in social optimum ,


Pi
I# being higher than quantity 64)
- - - - -

-1
-




consumed - Thisisbecaute
,

p* -
- - - - -
- -


t
1
1
Therefore there is underproduction causing awelfarelessintheshadedregion .


,


i I MPB=mˢB
Thiscautesthemaneettotailanatheretobealbcative inefficiency .




Qi Q* Q