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What is Market Failure?
Market failure occurs when the equilibrium price and output levels in a
market are socially undesirable or are inefficient
Consequently resources are not allocated to their best of optimum use
There are five types of market failure:
1. Externalities
2. Public goods
3. Imperfect market information
4. Factor immobility
5. Unstable commodity markets…read more

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Externalities are third party effects that the activities of buyers or sellers
They can also be called spillover effects
They can be positive or negative…read more

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External Costs (Negative Externalities)
May occur in the production or the consumption of a good or service
For example a negative externality of the production of chemicals is the
firm polluting a river
This does not impact on the firm directly, but rather impacts on the water
supply to industries, and it may be expensive to purify the water
A negative externality of consumption is a person smoking tobacco
They are polluting the air of others, causing passive smoking where non-
smokers can suffer the same illnesses as smokers…read more

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Private Costs
In a free market (no government intervention), producers are only
concerned with the private costs of production
These are costs internal to the firm, which it pays for
For example; rent, wages, buying materials, machinery costs, electricity
and gas bills, insurance and transport costs
Private costs may also refer to the market price that a consumer pays for
a good or service…read more

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Social Costs
By adding private costs to external costs, we obtain social costs.
External costs, are therefore, the difference between private costs and
social costs
Adding external costs onto the
production of a good or
service, causes the supply
curve of the firm to shift to the
left, and become the marginal
social cost…read more

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