Re-cap test Define the following terms, using examples to aid your answer External Cost/Benefit (2) Private Cost/Benefit (2) Social Cost/Benefit (2) How is the true social cost benefit calculated? (2) Why are are externalities a problem for our economy? (2)

Lesson Objectives All students will understand the importance of market failure and externalities Most students will be able to assess the implications of market failure Few students will understand the importance of market failure on the economy

Market Failure in society Things to consider Public Goods Merit Goods Demerit goods Externalities Factor immobility Imperfect information Economic consequences of environmental change

Public Goods Public goods are defined by two characteristics. They must be: Non-excludable. Once the good is provided for one consumer, it is impossible to stop other consumers benefiting from the good. Non-rival As more and more people consume the product, the benefit to those already consuming the product is not diminished.

Merit Goods: The Market Failure Merit goods will be under-produced in a free market. Insufficient scarce resources will be allocated to their production. Insufficient demand is registered in the market, because individuals do not understand how good the product is. If the information failure did not exist, the ‘correct’ level of demand would be higher.

Demerit Goods: The Market Failure Demerit goods will be over-produced in a free market. Too many scarce resources will be allocated to their production. Consumers value the product too highly, because they do not understand how bad the product is. If the information failure did not exist, the ‘correct’ level of demand would be lower.

Merit and Demerit Goods The definition of a merit good or a demerit good involves information failure related to the knowledge of the consumer. A merit good is better for a person than they realise. A demerit good is worse for a person than they realise.

Externalities Economists assume certain things about the interaction of supply and demand: All market transactions occur between a producer and a consumer. Each of these involves an economic decision. Each decision made should only affect the producer and consumer directly involved.

Externalities: The Market Failure When externalities are present, the free market will produce the wrong quantity. A negative externality will mean that too much of a product is produced. A positive externality will mean that not enough of a product is produced. Neither of these situations are economically efficient.

Marginal Costs and benefits Explain figures 1 & 2 pg 54

Immobility of labour We will not gain an efficient allocation of resources if we have immobility of resources. Labour is of course a vital factor of production, vital resources so if we have labour immobility it will affect the efficiency of markets, and could represent a market failure. Geographical mobility refers to ability to move where jobs are available, occupational mobility is the ability to change type of jobs.

Imperfect or asymmetric information Imperfect (lack of information) or asymmetric (buyer or seller knowing more than the other) information can also lead to market failure. Example pg 50.

exam style Q Look at exam style Q pg56 Work in pairs to create a plan for this answer in your note book