DHS Y5 H2 Economics_ Content Clinic 2 (Market Failure)

H2Economics:ContentClinic2 KeyDefinitions:1.Marketfailureoccurswhenthefreemarketisunabletoallocateresourcesefficiently.2.Productiveefficiencyoccurswhenthe maximumpossibleamountof outputis beingproducedfromagivenamountofresources.3.Allocativeefficiencyoccurswhentheproductionofonecombinationofgoodsandservicesmaximisessociety’sutility.4.Publicgoodsaregoodsthatexhibitthe3 characteristicsofnon-rivalry, non-excludabilityandnon-rejectability.5.Non-rivalryoccurswhentheconsumptionof a goodbyoneormoreconsumersdoesnotreducethequantityavailableforotherstoconsume.6.Non-excludabilityoccurswhenit is impossibletoexcludenon-payersfromconsumingthegoodonceitisproduced.7.Non-rejectabilityoccurswhenconsumersareunabletorefuseconsumptionofagoodonceitisproduced.8.Negativeexternalitiesare negativespill-overor third-partyeffectsgeneratedfromtheconsumption/productionofagood/service.9.Positiveexternalitiesare positivespill-overor third-partyeffectsgeneratedfromtheconsumption/productionofagood/service.10.Thirdpartiesarepeoplewhoarenotdirectlyinvolvedin themarkettransaction.(i.e.familymembers,friends,thegovernment,employers)11.Imperfectinformationoccurswhenthereisincompleteorinaccurateinformationavailabletosociety.12.Asymmetricinformationoccurswhenonepartyhasmoreinformationthantheother.13.Factorimmobilityrefersto theinabilityof factorsof productionto shiftfromoneusetoanotherduetogeographicaloroccupationalboundaries. KeyConcepts:a)SourcesofMarketFailure: PublicGoods Diagram: N/A(Missingmarket) Explanation: 1.Free-riderproblem● Non-excludability:Non-payersableto enjoythegood→ Noonewillingtopay→Waitforotherstopay→Noexpressionofdemand● Non-rivalry:Quantityavailabledoesnotdiminishwhennon-payersfree-ride→Free-ridershipcontinuestoperpetuity2. Efficientpricetochargeis0(Non-rivalry)● Non-rivalry:Quantityavailabledoesnotdiminishwhennon-payersfree-ride→MCofoneadditionaluserofthegoodis0,onceit hasbeenproduced→Allocativelyefficientpricetochargeis0 →Goodshouldbemadeavailabletoanyonethatderivespositivemarginalbenefit→ Noprofit-drivenfirmswillingto supplythegood→Nosupply Inefficientallocationofresources: Noallocation

NegativeExternalities Diagram: Perspective:ConsumptionORProduction Explanation:7Steps:1. Establishfree-market/privateequilibrium(MPC=MPBatQp )2. Stateassumptions(AssumeMEB=0)3. Explaindivergence(MSCaboveMPC)4. Establishsociallyoptimalequilibrium(MSC=MSBatQs )5. Identifyinefficientallocationofresources(Qp >Qs )6. Derivedeadweightloss(Netsocialcostsincurred)7. Linktomarketfailure Inefficientallocationofresources: Over-allocation PositiveExternalities Diagram:

Perspective:ConsumptionORProduction Explanation:7Steps:1. Establishfree-market/privateequilibrium(MPC=MPBatQp )2. Stateassumptions(AssumeMEC=0)3. Explaindivergence(MSBaboveMPB)4. Establishsociallyoptimalequilibrium(MSC=MSBatQs )5. Identifyinefficientallocationofresources(Qp <Qs )6. Derivedeadweightloss(Netsocialbenefitsforgone)7. Linktomarketfailure Inefficientallocationofresources: Under-allocation ImperfectInformation(Und