Economics - Market Failure Definitions

1. Indirect Taxes

2. Subsidies

3. Price Controls

4. Direct Provision of services

5. Regulation and legislation

1. Earn tax revenue

2. Support firms & Support households on low incomes

3. Influence the level of production/consumption

4. Correct market failure

5. Reduce income inequality

The market results in an inefficient allocation of resources

Costs to those involved in the transaction

Costs to people outside the transaction

Private Costs + External Costs

Benefits to those included in the transaction

Benefits to third parties outside the transaction

Private benefits + External benefits

Additional cost to society from producing one more unit of output

Additional benefit to society from producing one more unit of output

The level of output where community surplus is maximised (MSC=MSB)

Loss in community surplus as a result of not producing at the social optimum

Both non-excludable and non-rivalrous

Once the good is provided, you cannot prevent anybody from using it

Consumption by one person will not reduce the amount available to others

both rivalrous and excludable.

non-rivalrous but excludable

non-excludable but rivalrous

Refers to someone who benefits from a good/service but avoids paying for it

Public goods will not be provided at all by the free market

No incentive to provide the good

A good that will be overconsumed if left to the free market because there are negative externalities in consumption

A good that will be underconsumed if left to the free market, because there are positive externalities in consumption

An indirect tax that is imposed on goods with negative externalities

An indirect tax on carbon dioxide emissions (a type of pigouvian tax)

are permits to pollute, issued by a governing body, which sets a maximum amount of CO2 emissions allowed. Firms may trade these permits for money.

Government pays a firm to produce a good/service

People use the common pool resource as much as possible so others do not use it up before them