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Ellie Griffiths

Market Failure
Positive/Negative Externalities

Definition: An effect on a third party of someone else's action.
External costs have a negative effect: social costs < private costs
External benefits have a positive effect: social benefit > private benefit

Examples: Pollution from a factory would be a negative externality.

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Ellie Griffiths

Increase monitoring.
Strengthen incentives to conform. (e.g. Piece rate pay, no-claims bonuses)

Merit and Demerit Goods

Definitions: A type of information failure.
Merit goods: A product valued by society and judged that all should have. It is more
beneficial to a consumer than they realise. Consumption of merit…

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Ellie Griffiths

come at the expense of allocative efficiency. They can restrict supply and overprice, leading to low
consumer surplus, high consumer surplus and a welfare loss.

(Pink represents consumer surplus, purple represents producer surplus, and magenta represents the
welfare lost.)

Solutions: The Competition Commission monitors the retail market to…

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Ellie Griffiths

for them. This is self-worsening by the nature of the market system.
It is also not an acceptable position for a society.

Solutions: Pensions, benefits, government intervention.

Public goods

Definitions: Non-excludable (benefits not confined to those who pay)
Non-rival (consumption by one does not reduce availability to others)…


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