en FI Market Failure 11 Tradeable permits: Permits issued to or sold to firms by the government allowing them to pollute a certain amount. Subsidies: A subsidy to the producer of a merit good reduces the private costs of production, increasing the good’s supply, lowering its price and increasing the equilibrium quantity produced and consumed in the market. Positive advertising: Raising awareness among consumers of the benefits of using a merit good will increase the marginal private benefits among consumers and thus demand, leading to a greater equilibrium quantity being consumed in the market. Legislation: Government may legally mandate the production or consumption of certain goods in order to increase the quantity produced and consumed in the market. State provision: In the case of purely public goods, those that are non-rivalrous in consumption and non-excluable by the producer, the government may have to provide the good. Negative Advertising: Raising awareness among consumers of the negative effects of a good’s production or consumption will reduce the marginal private benefit to consumers of the the good and thus its demand. Less demand means a lower equilibrium quantity in produced and consumed in the market. Corrective Taxes: A tax on the production of a demerit good increases the costs faced by producers, reducing the supply, raising the price and reducing the equilibrium quantity produced and consumed in the market. Demerit goods: are goods that the government thinks are bad both for the consumer and the society. They are over-provided by the market and will be over-consumed. Negative externalities of consumption: is a harmful side effect to the society due to the consumption by an individual. Negative externalities of production: is a harmful side effect to the society due to the production by a firm. Internalizing an externality: is a government action to achieve socially desirable equilibrium for the economy. Externality: is an unintended side effect that result from production or consumption of a good, affecting the third parties.

Market Failure

is a harmful side effect to the society due to the production by a firm.
Government may legally mandate the production or consumption of certain goods in order to increase the quantity produced and consumed in the market.
A tax on the production of a demerit good increases the costs faced by producers, reducing the supply, raising the price and reducing the equilibrium quantity produced and consumed in the market.
is a government action to achieve socially desirable equilibrium for the economy.
In the case of purely public goods, those that are non-rivalrous in consumption and non-excluable by the producer, the government may have to provide the good.
is an unintended side effect that result from production or consumption of a good, affecting the third parties.

Raising awareness among consumers of the benefits of using a merit good will increase the marginal private benefits among consumers and thus demand, leading to a greater equilibrium quantity being consumed in the market.
Permits issued to or sold to firms by the government allowing them to pollute a certain amount.
Raising awareness among consumers of the negative effects of a good’s production or consumption will reduce the marginal private benefit to consumers of the the good and thus its demand. Less demand means a lower equilibrium quantity in produced and consumed in the market.
A subsidy to the producer of a merit good reduces the private costs of production, increasing the good’s supply, lowering its price and increasing the equilibrium quantity produced and consumed in the market.
are goods that the government thinks are bad both for the consumer and the society. They are over-provided by the market and will be over-consumed.

Market Failure

NEGATIVEEXTERNALITIESOFPRODUCTION
LEGISLATION
CORRECTIVETAXES
INTERNALIZINGANEXTERNALITY
STATEPROVISION
EXTERNALITY

POSITIVEADVERTISING
TRADEABLEPERMITS
NEGATIVEADVERTISING
SUBSIDIES
DEMERITGOODS