ECON 2005 Lecture Notes - Lecture 25: Avoidance Speech, Market Failure, Marginal Cost
Document Summary
Sources of market failure: market failure occurs when resources are misallocated or allocated inefficiently. The result is waste or lost value: there are four important sources of market failure: Imperfect information: the existence of public goods, the presence of external costs and benefits. Sometimes called spillovers, third-party effects, or neighborhood effects: marginal social cost vs marginal private cost, when a firm decides how much of something to produce, they find the quantity where mr=mc. The mc the firm uses is the marginal cost that the firm alone bears (the private mc or mpc). If there is some other cost borne by societ(cid:455), the(cid:374) (cid:862)so(cid:272)iet(cid:455)"s(cid:863) mc (cid:272)ur(cid:448)e (cid:373)a(cid:455) (cid:271)e differe(cid:374)t tha(cid:374) the fir(cid:373)"s mc (cid:272)ur(cid:448)e (cid:894)the m c or (cid:373)argi(cid:374)al so(cid:272)ial (cid:272)ost(cid:895). Msc is equal to the sum of the marginal costs of producing the product (mpc) and the correctly measured damage costs involved in the process of production (mdc).
