question archive This week's discussion is focused on market failures
This week's discussion is focused on market failures
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This week's discussion is focused on market failures. The professor has pointed out that for the discussion a true market failure is needed. I'll have to explain how the PMC (private marginal cost) and the MSC (marginal social cost) were not truly equal and why. I was thinking of the auto industry as an example (2008) but I think the airline industry in 2020 or 2008 could be used also. I'm just not sure exactly how to explain the PMC and MSC
From the Boss
Locate a recent article or event (published within the last year) that highlights your relevant microeconomics topic.
"There are two important but detailed concept that must be applied in this discussion. Unfortunately the way this discussion is worded makes it appear that you can easily find news articles that explicitly state that a market failure has occurred and even worst that there has been or must be a so-called Government bailout as a remedy. Government bailouts ARE NOT THE REMEDY FOR MARKET FAILURES!!!!!!!!!
the simple and correct way to identify a market failure in economics is to be able to say that private costs of the firm (industry) DO NOT EQUAL ITS TRUE MARGINAL SOCIAL COST."
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Market failure is defined as a situation of inability of the market to reach the optimal level and allocate the resources in the most efficient way, which is due to presence of externalities.
Externalities refers to the effects on the third parties both negative and positive for which they are neither compensated or penalized.
Private marginal cost refers to the cost that is borne by the producer only which includes its cost of production of producing an additional unit of goods whereas Marginal social cost is the sum of the private marginal cost and marginal external cost, where marginal external cost is the additional cost borne by the society from the production of an additional unit of a good.
For automobile users the private marginal cost is the cost of fuel, whereas it also involves negative externalities in the form of air pollution, traffic congestion and traffic accidents, cost of which is not included in the private marginal cost but it is included in marginal social cost.
Private marginal cost is less than the marginal social cost due to which when external cost is not included it results in overproduction of the good.
