- Market failure: a misallocation of resources (when goods are allocated at the wrong quantity or price).
- Externalities: cost or benefit to a third party from a transaction.
- Private costs: the cost to the producer e.g. of making the good.
- External costs: cost to the third party e.g. neighbours/ taxpayers.
- Social costs = private cost + external cost.
- Private benefits: the benefit to the consumer e.g. utility/ enjoyment.
- External benefits: benefit to the third party e.g. neighbours/ taxpayers.
- Social benefits = private benefit + external benefit.
- Merit goods such as vegetables have a positive externality in consumption because they benefit the buyer and other parts of society.
- Demerit goods such as tobacco have a negative externality in consumption because they cost the buyer and other parts of society.
- Insert diagrams!!!!!!!!!!!
- Pure public goods are non-rival and non-excludable.
- Non-excludability: cannot prevent access e.g. a gate/ barcode.
- Non-rivalry: when a good is consumed by one person, it does not reduce benefits others can gain from it (it can be shared without compromise).
- Non-rejectability: cannot opt-out and reject its benefits.
- A public good may take on some characteristics of a private good and become a quasi-public good (e.g. toll roads).
- Technological change is significant (e.g. television broadcast is now excludable).
- The free-rider problem occurs when non-excludability leads to a situation in which not enough customers choose to pay for a good, preferring to free ride instead. As a result, the incentive to provide that good through the market disappears, leading to a missing market.
- The tragedy of the commons is a situation where there is overconsumption of a particular product / service because rational individual decisions lead to an outcome that is damaging to the overall social welfare (e.g. overfishing).
- Information gaps is another cause of market failure.
- Symmetric information is when both parties have the same information as each other. Asymmetric information is when one party e.g. buyer has more information than the other e.g. seller.
- Information gaps leads to misallocation of resources because people are not able to realise the correct benefits or costs of a transaction.