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1. Market Failure
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2. MARKET FAILURE
• Market failure means that the
market mechanism does not achieve
desirable results.
• Sources of market failure include lack
of competition (monopoly),
externalities, public goods, and income
inequality.
• Although controversial, government
intervention is a possible way to
correct market failure. 2

3. P
200 Monopoly and deadweight loss
175
150
MC (S)
125
100
75
50
25 MR D
1 2 3 4 5 6 Q 3

4. EXTERNALITIES
~ An externality is a cost or benefit of a good imposed
on people who are not buyers or sellers of that good.
~ Negative externality – external cost imposed to third
parties. E.g. Pollution, (too many resources are used to
produce the product responsible for the pollution) –
result in overproduction and underpricing.
~ Positive externality – external benefits enjoyed by
third parties. E.g. vaccination (too little resources are
allocated for the product) – result in underproduction
and underpricing.
~ Two basic approaches to solve this market failure are
taxes (like in pollution taxes) and regulation (like in
vaccinations). 4

5. External Cost of Pollution
Includes external costs of pollution
P2 S2 S1
P1
D
Excludes external costs of pollution
Q2 Q1
5

6. External Benefits of AIDS Vaccinations
Includes Vaccination benefits
S
P2
P1
D2
Excludes Vaccination benefits
D1
Q1 Q2 6

7. PUBLIC GOODS
• Public goods are goods that are consumed by
everyone regardless of whether they pay or not.
• Two properties of a public good: 1) Non-
exclusive; 2) Non-exhaustive
• e.g National defense, air traffic control, and
other public goods can benefit many
individuals simultaneously and are provided by
the government.
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8. Private goods vs. Public goods
• Consumption:
•Private good – only payers can consume
•Public good – nonpayers can still consume
• Supply – both production involve money cost and
opportunity cost
•Private good – production is profitable
(supplied by private firms)
•Public good – production not profitable
(provided by the govt or produced collectively)
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