• Market Failure: Occurs when the free market doesn't efficiently allocate resources for the best interests of society.
• Types of Market Failure:
  • Externalities: Costs or benefits a third party receives from an economic transaction outside the market.

    • Positive Externalities: Associated with merit goods, underprovided in the market (e.g., education, healthcare).

      • Positive externality: Higher skilled workforce.

    • Negative Externalities: Caused by demerit goods, usually overprovided (e.g., cigarettes, alcohol).

      • Negative externality: Second-hand smoke or passive smoking.

      Market Failure Evaluation:

      • Value Judgment: Assessing the extent of market failure involves subjective judgment.
      • Monetary Value of Externalities: Difficult to quantify (e.g., cost of pollution).
      • Subjective Perceptions: Vary among individuals based on experiences and circumstances.
      • Challenges for Government Policies: Determining appropriate interventions becomes complex.

Private Costs:

• Private Costs: Include expenses like rent, machinery, labor, insurance, transportation, and raw materials.
• Producer's Supply Decision: Private costs influence a producer's supply decisions.
• Market Price: May also refer to the price paid by consumers for the product.
• Marginal Private Cost: The cost incurred by a firm when producing one additional unit.

Social Costs

• Social Costs: Calculated by adding private costs and external costs.
• External Costs: Represented by the vertical gap between private costs and social costs on a diagram.
• Marginal Social Costs (MSC): Differ from marginal private costs (MPC) as external costs increase disproportionately with higher output.
• Marginal Social Cost (MSC): Measures the extra cost to society per additional unit consumed, equal to the sum of marginal external cost and marginal private cost.

Private Benefits:

• Consumer's Perspective: Private benefits are the satisfaction consumers gain from consuming a good, determined by the price they are willing to pay for it.
• Firm's Perspective: For firms, private benefits may refer to the revenue generated from selling a particular good.

Social Benefit:

• Social benefits encompass both private benefits (consumer satisfaction) and external benefits.
• In graphical representation, external benefits are illustrated as the gap between the private benefits and social benefits curves.
• External benefits tend to grow disproportionately as the level of output increases.