Market Failure
a tree marke market equilibrium there is an efficient
allocation of scare resouries
cesicostsabenents market equilibrium Oscar's
g me MPC MPB S D
Private optimum
allocative efficiency
MSC MS B S D allocatively
efficient
D MPB MSB Social optimum
Qa Q
Pa Qa allocative efficiency
SUPPLY CURVE DEMAND CURVE
Private costs Pc cost of Private benefits PBS
production for producer individual consumer benefits
marginal extra costs when consumers are consumin
when producing amore unit like the satisfaction
marginal extra benefits
social costs Pct Ef when they consume a more
EC impacts on 3rd parties unit
not involved in transaction
production eg waste social
EB
Benefits SB
PBted
any impact on 3rd
could be attested negatively parties not involved in
it Ec are present Sc Pc transaction consumption
or benefitted Ec will be negative could be positive impact
bringing down social costs SB PB or negative negative
external benefit bringing
in a tree market sallocative down social benefits
efficiency assume there is
no external costs Msc MPs tree market no external
benefits or externalities
free market no externalities no external costs or
benefits
Msp Mpp demand
MSC MPC supply
, consumer surplus difference between prime consumers
are willing able to pay and the pri te they actually pay
P
D below D curve and above price line
H É of these
all consumers are
willing and able to pay a higher
price than Pa but they only pay Pas
so they set surplus welfare
QL Q Q
B increasing prines will decrease consumer surplus as
there are less consumers gaining surplus
so dropping priies increases consumer surplus
Producer surplus difference between the price producers are
willing and able to supply a good service too and price they
actually relieve
D above supply curve and below
P price line
pit and able to sell their goods at
a lower i prile than Pa but they
are actually selling it at Pi
i
surplus
drop prices decreases producer surplus
economic market Society surplus CS Ps
or community
on s
Urp Vs
mn
roduler
urplus
mm D
Q1
, what is allocative efficiency
1 maximization Of society surplus CS t PS D S
link back to economic problem allocating scare res our ie
given unlimited wants
2 economic agents in tree market
consumers producers satisfy Wants
have wants
it both of these agents are as happy as possibles
that is allocativelyettinient
this occurs at equilibrium Ps Qa when D s
any prite above or below Pa Will P N Ps Cs
2 Maximization of net social benefit
MSB MSC basically when S D
us because any quantity above Qa
higher
higher social cost will be higher than
social benefit
iy
is so reducing net
t social benent
I I MSB
I any quantity being produced that
Q2 Qos Q is lower than an Msp is higher
than Msc because Ms B Ms until
Qp So stopping here will be losing
MSP Msc Ms SB out on
potential net social benefit
Fans
3 Where resouries perfectly follow consumer demand
D S
occurs at equilibrium
no surpluses ex less demand ex less supply shortages
a tree marke market equilibrium there is an efficient
allocation of scare resouries
cesicostsabenents market equilibrium Oscar's
g me MPC MPB S D
Private optimum
allocative efficiency
MSC MS B S D allocatively
efficient
D MPB MSB Social optimum
Qa Q
Pa Qa allocative efficiency
SUPPLY CURVE DEMAND CURVE
Private costs Pc cost of Private benefits PBS
production for producer individual consumer benefits
marginal extra costs when consumers are consumin
when producing amore unit like the satisfaction
marginal extra benefits
social costs Pct Ef when they consume a more
EC impacts on 3rd parties unit
not involved in transaction
production eg waste social
EB
Benefits SB
PBted
any impact on 3rd
could be attested negatively parties not involved in
it Ec are present Sc Pc transaction consumption
or benefitted Ec will be negative could be positive impact
bringing down social costs SB PB or negative negative
external benefit bringing
in a tree market sallocative down social benefits
efficiency assume there is
no external costs Msc MPs tree market no external
benefits or externalities
free market no externalities no external costs or
benefits
Msp Mpp demand
MSC MPC supply
, consumer surplus difference between prime consumers
are willing able to pay and the pri te they actually pay
P
D below D curve and above price line
H É of these
all consumers are
willing and able to pay a higher
price than Pa but they only pay Pas
so they set surplus welfare
QL Q Q
B increasing prines will decrease consumer surplus as
there are less consumers gaining surplus
so dropping priies increases consumer surplus
Producer surplus difference between the price producers are
willing and able to supply a good service too and price they
actually relieve
D above supply curve and below
P price line
pit and able to sell their goods at
a lower i prile than Pa but they
are actually selling it at Pi
i
surplus
drop prices decreases producer surplus
economic market Society surplus CS Ps
or community
on s
Urp Vs
mn
roduler
urplus
mm D
Q1
, what is allocative efficiency
1 maximization Of society surplus CS t PS D S
link back to economic problem allocating scare res our ie
given unlimited wants
2 economic agents in tree market
consumers producers satisfy Wants
have wants
it both of these agents are as happy as possibles
that is allocativelyettinient
this occurs at equilibrium Ps Qa when D s
any prite above or below Pa Will P N Ps Cs
2 Maximization of net social benefit
MSB MSC basically when S D
us because any quantity above Qa
higher
higher social cost will be higher than
social benefit
iy
is so reducing net
t social benent
I I MSB
I any quantity being produced that
Q2 Qos Q is lower than an Msp is higher
than Msc because Ms B Ms until
Qp So stopping here will be losing
MSP Msc Ms SB out on
potential net social benefit
Fans
3 Where resouries perfectly follow consumer demand
D S
occurs at equilibrium
no surpluses ex less demand ex less supply shortages
