What is the most optimal way to allocate resources?
The most optimal way to allocate resource is when there’s a price equilibrium.
Perhaps giving people the same stuff (communism)
What does it mean by market failure ?
Markets are not perfect
Example, consumer +producer surplus = community surplus is not maximized.
Occurs when the production and consumption of a good by the free market takes place
at a level that is not socially optimum.
Common examples of market failure
1) lack of public goods
2) under-supply of merit goods
3) oversupply of demerit goods
Public goods
1) non excludable
Impossible to stop other people consuming it once it has been provided.
2) non-rivalrous
Consuming this product does not prevent another person from consuming it as well.
“Public goods are goods that would not be provided at all in a free market”
Free market = no public goods
1) non-excludable
Others gain bene t, even though they paid nothing
2) non-rivalrous
Private bene t is very small compared to cost, social bene t will be huge compared to the cost.
Merit goods
Goods that provide positive bene t to society when consumed
All merit goods are public goods
Underprovided Should be consumed more More bene t to society
Under-supply of merit goods
Solution?
Regulating laws to control it
Subsidy for less demerit goods product OTop
Opportunity cost
Long-term bond —> hard for a government to pay off debt
Not maximizing the stadium well less incomes
, Demerit goods - over-provided by the market and it is over consumption for example, cigarette and alcohol
- providing negative externality to society
Demerit goods solution
Tax
Negative advertising
Marginal = the extra you get after each EXTRA consumption (+1)
Marginal bene t (MB) - the extra bene t you get after each extra consumption
Marginal cost (MC) - the extra cost you pay for each extra consumption
Any extra bene t/ cost and in generally the more you have, the less useful it is.
Pn
Both societyand personagree itistrue
r
60 Thelawof deminishingreturn
D MB
l 2 3 4 5 6 7 Q
P S MC
n
moreexpensive
to havemoreextra 42
product
Equilibrium point is the most ef cient point
I 2 5 o SQ
to maximise society bene ts as well as minimize society cost. 3 4
The most optimal way to allocate resource is when there’s a price equilibrium.
Perhaps giving people the same stuff (communism)
What does it mean by market failure ?
Markets are not perfect
Example, consumer +producer surplus = community surplus is not maximized.
Occurs when the production and consumption of a good by the free market takes place
at a level that is not socially optimum.
Common examples of market failure
1) lack of public goods
2) under-supply of merit goods
3) oversupply of demerit goods
Public goods
1) non excludable
Impossible to stop other people consuming it once it has been provided.
2) non-rivalrous
Consuming this product does not prevent another person from consuming it as well.
“Public goods are goods that would not be provided at all in a free market”
Free market = no public goods
1) non-excludable
Others gain bene t, even though they paid nothing
2) non-rivalrous
Private bene t is very small compared to cost, social bene t will be huge compared to the cost.
Merit goods
Goods that provide positive bene t to society when consumed
All merit goods are public goods
Underprovided Should be consumed more More bene t to society
Under-supply of merit goods
Solution?
Regulating laws to control it
Subsidy for less demerit goods product OTop
Opportunity cost
Long-term bond —> hard for a government to pay off debt
Not maximizing the stadium well less incomes
, Demerit goods - over-provided by the market and it is over consumption for example, cigarette and alcohol
- providing negative externality to society
Demerit goods solution
Tax
Negative advertising
Marginal = the extra you get after each EXTRA consumption (+1)
Marginal bene t (MB) - the extra bene t you get after each extra consumption
Marginal cost (MC) - the extra cost you pay for each extra consumption
Any extra bene t/ cost and in generally the more you have, the less useful it is.
Pn
Both societyand personagree itistrue
r
60 Thelawof deminishingreturn
D MB
l 2 3 4 5 6 7 Q
P S MC
n
moreexpensive
to havemoreextra 42
product
Equilibrium point is the most ef cient point
I 2 5 o SQ
to maximise society bene ts as well as minimize society cost. 3 4
