Review: The Overall Picture

1
Review The Overall Picture
SMCMSC
DMBMSB
Q
Market Failures inefficient outcomes
Externalities
Market Power
2
ReviewInefficiency with an External Cost

• The efficient quantity is where MSB MSC
• The private market overproduces and generates a
  deadweight loss.

3
ReviewInefficiency with an External Benefit

• The efficient quantity is where MSB MSC
• The private market underproduces and generates a
  deadweight loss.

4
Key ideas

• Many actions create externalities they affect
  other people but we do not take the costs and
  benefits of these externalities into account when
  making choices.
• Negative externalities lead to inefficient
  outcome of overproduction.
• Positive externalities lead to inefficient
  outcome of underproduction.