The Economics, Business & Enterprise Association

The Professional Subject Association for Teachers and Lecturers of Economics, Business and Enterprise

A/AS Level Economics Market failure Resource 6 Externalities A cost or benefit of either production or consumption, which has spill-over effects that affect a third party, not paid by the producer or consumer Private costs !osts directly incurred by consumers and producers when they en"a"e in economic activity External costs The difference between private and social costs These are the costs e#perienced by a third party not directly involved in the economic activity Merit goods A "ood considered to be socially beneficial $t usually has e#ternal benefits Demerit goods A "ood considered to be socially harmful $t usually has e#ternal costs Market based instruments %evices aimed at buildin" the full effects into the mar&et price so that the price mechanism can be used to allocate resources efficiently because the revised price reflects the full costs This is called internali'in" the e#ternality Property rights Private ownership of scarce resources which "ives the le"al entitlement to use ( sell property and the ri"ht to sue for compensation Public good As opposed to a private "ood $t has non e#cludability )which means that if it is produced no one can be e#cluded from its use* and non rivalry )one person benefitin" doesn+t reduce the amount available for others* Government failure When government intervention to correct market failure leads to a net loss in economic welfare. In other words they make it worse than the market failure to egin with. ! EBEA " #$$% " 1 of 1