MARKET FAILURE

market failure occurs when the producers fail to

produce the product that the consumers demand in
the right quantity at the lowest possible cost
examples of this are; surplus, excess demand, high
prices, poor quality etc.
the production and consumption of some products
may affect people who are not directing involved in
either of these processes these people are called
third party.
private benefits are those which are directly
received by those involved in the production aur
consumption of a product.
Social benefits are those benefits which are
received by the society because of an economic
activity.
Social costs the total cost to a society by a
economic activity
Private costs are those which are borne by those
individuals directly involved in the production or
consumption process.
External costs are those which are imposed on
the individuals which aren’t directly involved in the
production or consumption process of a product.
For example if a company is producing chemical
those who live nearby will experience all sorts of
pollution [which will be considered as external cost
to the company].
If the producers only take into account the private
cost and not the external costs the production will
be much higher.
External benefits are those received by those
who are not directly involved in the consumption or
production process in the activity of other. For
example, when people take degrees from colleges
along with the private benefits they also provide
the society with good quality output as they are
now skilled in their individual fields of choice.
Socially optimum output is the level of output
where the social cost is equal to the social benefits
and there is maximum society welfare.
If the social cost of producing or consuming a
product is more than the social benefit the society
would benefit more if the production of that
product is lowered and the resources are used
somewhere else.
Relatively, if the social benefits are more than the
social cost of the consumption or production of the
product than the society would benefit more if the
production was increased.
 Information failure
The consumers need to know what benefits
product provides for them what quality it’s made
from the best quality and quantity at the lowest
price is the information that will provide the
consumers with satisfaction and will encourage
them to buy the product
Similarly, the workers need to know where the
workplace what the qualifications of the jobs are
what are the skillsets required and the nature of
the job to be able to apply for the jobs they are
qualified for. If this information is not provided
wrong employees might be employed and the
production cost may be high without the best
outcome they can get
Producers also need the information to be available
about what products are in demand where they can
get the good quality raw materials at the lowest
cost, if this doesn’t happen the cost of the product
may be higher than what it needs to be and the
quality might not be top-notch or what the
consumers expect which will decrease the demand
of the product. Producers also need to find the best
cost effective production method to keep their cost
low and if not the production cost may be high and
hence decreasing the demand because
competitors may be offering same quality products
with lower price,
Information failure occurs when there is lack of info
or inaccurate information, there also may be
asymmetric information between the supplier and
the consumer for example; when a mechanic tells
an individual that their car needs expensive repair
they won’t have the sufficient knowledge to
question the claim
merit goods
these are the goods which have more benefits to
the consumers than they think and which the
government considers underappreciated and these
goods would be left under consumed hence under
produced if left to the market sources. These
products have positive externalities.
Healthcare is an example of merit good. People
don’t realise the importance of regular checkups
and the benefit of their fitness and health to others
such as if a workers goes to their regular checkups
they are most likely to stay fit and prevent from
any diseases spreading in the workplace hence less
time off and increased output.
To increase the consumption of these goods the
government need to advertise the benefits and
providing better information to the consumers if
this method doesn’t work the govt. needs to take
different approaches such as making it mandatory,
or providing the good for free or at a very low cost

Demerit goods
These are the goods which are harmful to the
consumers and have many external costs. They are
high in demand and will be overconsumed if left to
the market forces.
Examples for demerit goods are cigarettes people
who smoke get numerous diseases as a side affect
of smoking and the people around the who are
inhaling the smoke also get affected by it even tho
they aren’t the ones smoking.
These goods however are over consumed and
hence over produced to tackle this problem the
government can impose high taxes on the
production and consumption of these goods. They
can also provide information about how harmful
these products are. In some cases id deemed
necessary the government can ban the usage of
these products such as in some countries smoking
is banned in public places and people get fined if
they disobey this discourages consumption for
various reasons such as too many restrictions, high
cost, and feeling guilt about the disadvantages
you’re causing to yourself and the others around
you because they are now aware about what
they’re consuming and how it affects others and
themselves

Public and private goods

Public goods are those goods which are non-
excludable and non-rival which means that they
can not be excluded for those who don’t pay for
them as they are handled by the government
[ paid by the revenue of taxes] examples of this are
defence or streetlights. Non tax payers can not be
excluded from using the streetlight or the cost of
protecting one more person doesn’t make a
difference
Private goods are excludable and have rivals and
competition. These are handled by the private
sector and it is possible to exclude the non-payers
to use these goods such as if one patient takes the
bed or room in a hospital another patient can not
take the same room at the same time or if one
person buys a laptop another can not get that
laptop. These however are a special type of private
good which is merit good, these goods also have
competition which means there are subtitues
available.
Abuse of monopoly
when there is monopoly in the market and
there is no competition the producers may take
advantage of this and increase the prices and
make them unfairly high or they might reduce
the quality but the consumers have to buy
from them as they are the sole producers in
the market they might merge to reduce
competition and be the monopoly and the
producers may all agree to set the same high
price so the consumers have no choice or
substitute but to accept the high prices this is
also known as price fixing
to avoid this the government can put restrictions
on the merging of companies and banning
illegal tactics such as price fixing to increase
competition the government can make the
market easy to enter with little to no
restrictions which will increase competition
 they can also reduce tax which will motivate
other companies to join the market.
Immobility of resources
It is important to decrease the production of those
products which are low in demand and increase
the production of those which are high in
demand but for this to happen the fops need to
be mobile if the demand of steel is low and the
demand of beauty services is high we can not
move the resources easily between the two so
there will be a surplus in the supply of steel
and a shortage in providing for beauty services
Shot termism
Private sector only cares about short term profits
and may not think about the long term growth this
results in lack of investments in the business and
hence government has to intervene.
Economic growth
When an economy has an increase in output it is
termed as economic growth. This is referred as
actual economic growth as it is short term
In the long term the economy needs to increase its
productive capacity when that is increased it is
termed as potential economic growth as it now has
the capacity and ability to produce more output.
The productive capacity of an economy can be
increased by the allocation of new fops or rise in
them.
Aggregate demand is the total demand of a
country at a given price level it includes
CUNSUMPTION, EXPORTS-IMPORTS, GOVERNMENT
SPENDING, INVESTMENTS.
C+I+G+[M-X] formula of aggregate demand
Why the government aims for economic growth?
Low unemployment
Balance of payment [ expenditure of imports is
equal to revenue of exports]
Price stability [ if the consumers know that the
price will stay stable in the future they wont do
anything that will result in rise in prices such as
bulk buying which increases the demand hence
increase in prices]
Target inflation rate is what the govt’ sets because
the price index that measures the rate of inflation
over states the increase in price levels.
The rise in prices might overshadow the
improvements the product has for example the has
has 3 new features and the price increased by 50$
is it the same car or is it a better version of it?
The rate of inflation also motivates producers in a
way that the increased prices of a product means
more profit hence better output
Redistribution of income [ from the rich to the poor]
implement taxes