Market Failure By the end of this lesson, you: Must know the difference between positive and negative externalities. Should understand how to draw diagrams to show externalities. Could be able to evaluate the extent of market failure for merit, demerit and public goods.

Positive Externalities

Partial market failure Free-rider problem Quasi-public good A good that would be over-consumed in a free market as it brings less overall benefit to the consumer than they realise. A good that has some of the qualities of a public good, but does not fully possess the two required characteristics of non-rivalry and non-excludability. A good that is both excludable and rival in consumption. Some consumers benefit from other consumers purchasing a good, particularly in the case of public goods. The free market fails to provide a product at all eg street lighting. A good that is both non-excludable and non-rival in consumption. A good that would be under-consumed in a free market as people do not fully perceive the benefits obtained from consumption eg education. Economic agents do not properly perceive the benefits or disadvantages of a transaction. The free market provides a product, but with a misallocation of resources eg merit goods. Merit good Demerit good Information failure Public good Partial market failure Free-rider problem Quasi-public good Private good Complete market failure

Merit Goods

Demerit Goods

Class A Narcotics