Embed Size (px)
DESCRIPTION
Citation preview
Market Failure
Diagrams and Definitions
What is market failure?
At times markets fail to
allocate resources efficiently
provide goods beneficial to
society
stop production and consumption of harmful goods
Sources of Market Failure
ExternalitiesMerit and Demerit Goods
Public GoodsAbuse of
Monopoly Power
Positive Externalities
Third parties benefit from the production
of goods and services
Third parties benefit from the
consumption of goods and services
Negative Externalities
Third parties bear spillover costs of the production of goods
and services
Third parties bear spillover cost of the
consumption of goods and services
Negative Production Externality
Negative Consumption Externality
Tax and Negative Production Externality
Tax on Producers and Negative Consumption Externality
Advertising to Shift Demand and Reduce Negative Consumption Externality
Correcting Negative
Externalities of Production
Legislation &
Regulation
Tradable PermitsTax
Correcting Negative
Externalities of
Consumption
Legislation &
Regulation
AdvertisingTax firm
Positive Production Externality
Positive Consumption Externality
Correcting Positive
Externalities of
Consumption
Legislation
AdvertisingSubsidies
Correcting Positive Externalities of
Production
Subsidy
Extension of Property Rights
to Correct Negative
Externalities
Internalize Externality
Market-based Appeal
Offending Firms and third parties
monitor progress
Public, Merit & Demerit Goods
Public Goods
• Non-Excludable• Non-rivalrous• Free riders
Merit Goods
• Merit goods are under-consumed and underprovided
Demerit Goods
• Demerit goods are overconsumed and overprovided
• Positive externalities• Lack of income • Lack of knowledge
Merit Goods
• subsidies• government provision• advertising• regulation
Solutions
• Negative externality
• Lack of knowledge and/or apathy
Demerit Goods
• tax• advertising• regulation
Solutions
• inefficiencies • higher prices
Monopoly Power
• legislation and regulation
• government ownership
Solutions
