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Externalities, solutions and other market failure

Page 2

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Today's presentation
What is market failure?



Externalities



Solutions



Other kinds of market failure

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What is market failure?




This definition comes up regularly!

It pays to define this term whenever it appears in the
question (just like other definitions)

Page 4

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Externalities

Page 5

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What they
are



Positive
Solutions and
Things negative
you need
to know


What
makes The
them diagrams
large/small

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What are externalities?
Positive externalities

The costs or benefit
received by a third party
to an economic
transaction outside of the
Negative externalities
market mechanism; i.e.
the spillover effects of an
economic activity.

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What things go in externality diagrams?



MSC, MPC, MSB,
Private = Social optimum
MPB




DWL Under/overproduction

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Externality 1: a negative externality
MSC
Price



Deadweight welfare loss

MPC 1. MSC, MPC, MSB, MPB

Social optimum 2. Private =
P2
3. Social optimum

Private equilibrium
4. DWL
P1
5. Under/overproduction




Overproduction MPB = MSB

Q2 Q1 Quantity

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Externality 1: a positive externality
Price


Deadweight welfare loss MPC = MSC
1. MSC, MPC, MSB, MPB

2. Private =
P2 Social optimum
3. Social optimum

4. DWL
P1
Private equilibrium
5. Under/overproduction


MSB
Under-
production
MPB
Q1 Q2 Quantity

Page 10

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davidsalter

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This 35 slide presentation covers all aspect of what market failure is, including the diagrams and goes onto analyse and evaluate the possible remedies.

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