in Economicchapter 13 market economic system centrally planned free market economies economies complete amount of government no government involvement in economic LESS Jeg control decision making control Market Economy Advantages Disadvantages Efficient allocation of High income inequality resources Wide consumer choice | Public goods may not be provided Encourages innovation | Risk of unemployment and entrepreneurship Quick response to Market failures (e.g., consumer demand pollution, monopolies) Competitive pricing Exploitation of workers or environmentMixed Economy Planned Economy Combines market freedom with government support Government interference may reduce efficiency Government provides essential services High taxes may reduce work/investment incentives Reduces income inequality Conflicts between public and private goals Encourages private business Some services may still be poorly provided Protects workers and environment with laws Risk of political disagreements over economic balanceAllocative Efficiency Allocative Efficiency Ss ess P PS D Q Quantity Price Underproduction Overproduction Price Price s 20 DWL = 16 rr 14 ‘DWL 12 - 8 D 5 10 Quantity 1012 QuantityMarket Failure Market failure is a scenario in which the allocation goods and services are not efficient. This happens when there are too little items produced (underproduction), or when too much items are produced (overproduction). Deadweight loss is the loss of economic efficiency that occurs when the market equilibrium for a good or service is not achieved. Sources of Market Failure/. Deadweight Loss Price & Quantity Control: limiting the amount of quantity produced or putting a cap on prices can block adjustments to market equilibrium, which leads to underproduction. Taxes: increases the prices paid by buyers, and lowers the prices received by sellers. So, sellers decide to sell less of the item, which causes an underproduction. Subsidies: lowers the price paid by buyers, and increases the prices received by sellers. Hence, sellers decide to sell more of the item, which causes an overproduction: Externalities: a cost or benefit that affects someone other than the buyer or seller. When suppliers/producers do not consider external costs that doesn‘t affect them, they overproduce. When buyers do not consider external benefits, there is an underproduction. Public Goods: A public good benefits everyone in the society, but not everyone wants to pay for it. Instead, people avoid paying for it, causing an underproduction. Common Resources: resources that are owned by no one, but can be used by everyone. Everyones self interest is to use the resource as much as possible, while ignoring the costs that fall on others. This leads to overproduction Monopoly: a firm that is the only provider of a good or service. In this case, firms tend to maximize profit by setting the price beneficial for them, and limiting the quantity sold. This leads to underproduction.Social Costs and Benefits chapter 14 Example: Factory Producing Cement Private Cost (PC): External Cost: The cost the factory pays to Pollution from the factory causes: produce 1 ton of cement: Health problems in the nearby Raw materials: $50 ‘community Labor: $30 Damage to crops and local environment Electr $20 Estimated cost to society per ton = $40 Total PC = $100 Social Cost (SC): ‘SC =PC + External Cost ‘SC = $100 + $40 = $140 @ When a firm makes decisions they will have 2 effects: > Private Costs and Private Benefits im these are the costs/profits the firm has > External Costs and External Benefits these are the costs/benefits obtained by people outside the business @ So:Merit and demerit goods Feature Merit Goods | Demerit Goods- Definition Goods that provide positive benefits to individuats|and ‘ociety Goods that cause harm to individuals and society Market Problem Under-consumed in free market Over-consumed in free market Reason for Failure People underestimate benefits orlcan't afford them People ignore long-term harm or lack awareness Examples Education, healthcare, vaccinations Cigarettes, alcohol, junk food Government Action Subsidies, free provision, awareness campaigns Taxes, advertising bans, regulation Externality Type Positive externalities Negative externalities