Section 2 4 2 Market Failure Externalities McGee

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Section 2 4 2 Market Failure Externalities McGee Powered By Docstoc
					+




    Market Failure:
    Externalities

          Section 2.4 HL Extension
    Market Failure and
    Externalities:
    the invisible hand
    pushes in such a way that
+   individual decisions do not lead
    to socially desirable
    outcomes.
+
    Definitions and Concepts

    Cost and Benefits
     External   Cost = cost to third parties
     External   Benefits = benefits to third parties

    Prices
     Send  signals about how resources should be
      allocated
     IfCosts or Benefits are not correctly
      considered, the market has failed
+
    Definitions and Concepts

       Externalities arise when the market clearing price creates
        benefits or inflicts costs on a third party

       Positive externalities arise when the social benefit of
        consuming another unit, i.e. the marginal social benefit
        (MSB), is greater than the marginal social cost (MSC) of
        producing it

       Negative externalities arise when MSB are outweighed by
        increased MSC - the market underestimates the true cost of
        the good to society and produced too much of it
+
    Negative Externalities



                     Free market Price     Free Market Price
  Product has
                        ignores this          misallocates
Negative External
                          negative            resources to
     Costs
                         externality        produce large Q




                    Less Resources
                      allocated and      If the P  then Q 
                    overconsumption
                         curtailed
+
    Positive Externalities
+ Free Market
+ Positive Externality  Underconsumption
+ Positive Externality  Underconsumption
+ Negative Externality  Overconsumption
+ Negative Externality of Consumption
 Overconsumption
+ Negative Externality of Consumption 
 Overconsumption
+
    Positive Externality
+
    Negative Externality
+
    Sustainable Development
+
    Sustainable Development

       The present use of resources in satisfying the needs of the
        economy should not lessen or limit future generations’ use
        of resources in satisfying needs

       To what degree is industrialization & resource consumption
        sustainable in the long run?
+
    Sustainable Development

				
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