Econ Chapter 4

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Demand side market failures

Occurs when demand curves do not reflect a consumer’s willingness to pay for a good or service

When do demand side failures occur?

When it is impossible to charge consumers for a product ( Fireworks display) Some can enjoy benefit without paying

Supply side market failures

Occurs when supply curves do not reflect the full cost of producing a good or service

When do supply side market failures occur?

When the firm does not have to pay full cost for producing a good External costs are not reflected in curve

Consumer surplus

Difference between what a consumer is willing to pay for a product and what the consumer actually pays Benefit from paying less than the max price

Producer surplus

Difference between what the price a producer receives versus and the minimum price they would accept

Productive efficiency

Minimizes the per-unit cost of the output produced

Quasi public goods

Public goods in which exclusion would be possible

Reallocation process

Government must free up public and quasi-public goods by reducing private demand for them It does this by: levying taxes on individuals and businesses Takes this money and spends it on the production of goods


Occurs when some of the costs/benefits of a good or service are passed onto someone other than the original buyer or seller

Positive externality

Too little is produced Demand side market failure

Negative externality

Too much is produced Supply side market failure

Government correction negative externalities

Legislation, taxes

Government correction positive externalities

Subsidies Government provision

Case thereom

Price sector bargaining can solve externality problem

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