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Economics IGCSEPDF 43
118 pagesrevision 46932
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factored into the market price
(e.g.,abeefarm'sbees pollinating nearby orchards).
Social Benefit:
The total benefit
tosociety,whichincludesboththeprivate benefit and the external benefit.
Social Benefit = Private Benefit + External Benefit
Market Failure
Market failure occurs when the price mechanism fails to allocate resources effectively. This is
the most disadvantageous aspect to the market economy. Causes of market failure are:
Cause of
Market Failure
Explanation
Consequence (Misallocation)
1.Public Goods
Goods that are non - excludable( non -
payers cannot be prevented from using
the good) and non-rivalrous (one
person's consumption does not reduce
another's ability to consume it).
Complete Market Failure: The
The market provides none of
the goods due to the
"Free-Rider
Problem"(individuals benefit
without paying), making it
unprofitable for private firms.
2.Merit Goods
Goods that are beneficial to society, but
consumers under-consume them
because they don't fully recognise the
private or external benefits (Information
Failure).
Under-provision/Under-
consumption: Resources are
under-allocated to these goods
(e.g., education, healthcare).
Social Benefit (SB) › Private
Benefit (PB).
3.Demerit
Goods
Goods that have harmful impacts on
consumers and society, often over-
consumed because consumers fail to
fully recognise the true negative costs
(Information Failure and often addictive
nature).
Over-provision/Over-
consumption: Resources are
over-allocated to these goods
(e.g., cigarettes, alcohol). Social
Cost (SC) > Private Cost (PC).
4.Externalities
The existence o f external costs o r
benefits. Negative Externalities
(e.g., pollution) mean the
producer/consumer does not pay the full
social cost.
Negative Externalities → Over-
production/Over-consumption.
Positive Externalities → Under-
production/Under-
consumption.