MARKET FAILURE

POSITIVE EXTERNALITIES

-Market failure: Occurs when price mechanism fails to allocate scarce resources efficiently -Merit Good: A good that is deemed socially desirable by the government but will be under-consumed or produced if left to the free market. -Non-Public Good: A good that fufills the 2 characteristics of rival and excludable -Positive externalities: Spillover benefits on 3rd parties who are not directly involved in the production or consumption of the good. Produces +ve externalities -> merit good -> define +ve externalities -> define MPB -> Define MPC -> Define MEB -> Assuming no external cost-> MSC = MPC. ->With free market, consumption will be at MPB = MPC -> Benefits of MEB ignored -> consumption below socially optimal level MSB = MSC -> dead weight loss. Due to imperfect information -> lack of awareness of benefits of healthcare -> perceive MPB to be lower than true value -> market eqm is lower than socially optimal level -> Market failure HEALTHCARE MPB is longer lifespan, higher lifetime income, non-material benefits of longevity MPC is the cost of healthcare born by individual MEB is productivity of workforce due to lack of illness

NEGATIVE EXTERNALITIES

-Demerit Good: A good that is deemed socially un-desirable by the government and will be over-consumed or produced if left to the free market. -Negative externalities: Spillover costs on 3rd parties who are not directly involved in the production or consumption of the good without compensation to the 3rd party. Produces ve externalities -> demerit good -> define ve externalities -> Define MPB -> define MPC -> Assuming no external benefits -> MPB = MSB -> with free market consumption, consumption will be at MPB = MPC -> cost of MEC ignored due to self interests -> consumption/production above socially optimal level MSB = MSC -> external cost to society -> market eqm lower than socially optimal output level -> market failure POLLUTION MPB: profits earned by firm MPC: Cost of production MEC: health problems on other people like asthma, lung problems Lost of man-hours due to more people fall ill -> productivity falls SMOKING MPB: Personal satisfaction (smoking) MPC: cost on health, cost of cigarettes MEC: health problems on other people like asthma, lung problems Lost of man-hours due to more people fall ill -> productivity falls CONGESTION MPB: Getting to destination MPC: Cost of petrol, Personal time spent MEC: Irritate drivers; employees/employers late -> reduce productivity

POLICIES FOR UNDERCONSUMPTION SUBSIDIES TO PRODUCERS AND CONSUMERS Subsidies -> lower cost of good by amount of subsidy -> shift MPC down -> if subsidy = MEB -> achieve eqm level where it is socially desirable EFFECTIVENESS (+) -Allow market forces to operate -> shifting resources of consumers and producers towards provision of the good. -Low cost ->consumers more inclined to pay for the good -> forgo consumption of other items -Low Cost -> producers able to enjoy higher profits and pass subsidy down to consumers -> lower price of good -More effective short run -> tackle directly self-interest of people -> lower price > increase quantity demanded EFFECTIVNESS (-) -Difficult to remove once implemented -> burden on government -> opportunity cost of upgrading other facilities (infrastructure, education) -Subsidies without aid of advertising campaigns may prove fruitless if various ethnic groups or lower educated groups of people unaware of it -More often it is unawareness rather than cost EDUCATION Education -> create awareness of benefits of the good -> highlight benefits -> consumers have better information -> choose to increase consumption of the good even if price is not reduced -> shift MPB to the right EFFECTIVENESS (+) -Lower cost to consumer and government in the LR -> no need for campaigns anymore next time after it become part of consumers lifestyle EFFECTIVENESS (-) -Rely on persuasion rather than specific self-interest ($$) of the people -Unpredictability -Opportunity cost of resources being diverted to more specific usage like better equipment (healthcare) -Cost still high -> poor / low income still cannot afford

COMPULSORY CONSUMPTION