2. What is market failure?
• Market failure - where resources are inefficiently allocated
due to imperfections in the working of the market
mechanism i.e.
– Externalities
– Merit goods / demerit goods
– Information failures
– Public goods
– Monopolies
– Factor immobility
– Inequalities in the distribution of income and wealth.
• When there is a clear economic case for government
intervention in markets where some form of market failure
is taking place
3. Externalities
• Externalities are third party (spill-over) effects
arising from production and consumption of
goods and services for which no appropriate
compensation is paid
• Externalities cause market failure if the price
mechanism does not take account of the
social costs and benefits of production and
consumption
• Externalities can be positive or negative
4.
5. Negative production externalities and
negative consumption activities
Costs and
Benefits
Marginal private
cost (MPC)
S
Marginal private and
social benefits
T Output
6. Negative production externalities and
negative consumption activities
Marginal social cost
Costs and (MSC)
Benefits
Marginal private
cost (MPC)
V
S
Marginal private and
social benefits
U T Output
7. Negative production externalities and
negative consumption activities
Marginal social cost
Costs and (MSC)
Benefits
W
Marginal private
Y cost (MPC)
V
Loss of Social
S Z Welfare due to
market failure
Marginal private and
social benefits
U T Output
10. Positive consumption externalities
Loss of Social
Welfare due to
Costs and
market failure
Benefits
Marginal private
C cost and social cost
A Marginal social
benefit
Marginal private
benefit
B D Output
12. Using cross-elasticity of
demand, assess the likely
relationship between the
demand for solar panels
and the price of
household electricity
from non-renewable
sources
13. Rising electricity
prices
Incentives to
switch to
renewable energy
There is a cost to
switching
Rising market
demand for solar
panels
14. Despite a strong rise in demand, the market price of solar panels
has fallen in recent years. With the help of a supply and demand
diagram, explain why this can have happened
Price of
solar S1
panels
P1
D1
Q1 Quantity
15. Despite a strong rise in demand, the market price of solar panels
has fallen in recent years. With the help of a supply and demand
diagram, explain why this can have happened
Price of
solar S1
panels
P1
D1
D1
Q1 Quantity
16. Despite a strong rise in demand, the market price of solar panels
has fallen in recent years. With the help of a supply and demand
diagram, explain why this can have happened
Price of
solar S1
panels
P2
P1
D2
D1
Q1 Quantity
17. Despite a strong rise in demand, the market price of solar panels
has fallen in recent years. With the help of a supply and demand
diagram, explain why this can have happened
Price of
solar S1
panels
P2
P1
S2
D2
D1
Q1 Quantity
18. Despite a strong rise in demand, the market price of solar panels
has fallen in recent years. With the help of a supply and demand
diagram, explain why this can have happened
Price of
solar S1
panels
P2
P1
S2
P3
D2
D1
Q1 Quantity
19. Despite a strong rise in demand, the market price of solar panels
has fallen in recent years. With the help of a supply and demand
diagram, explain why this can have happened
Price of
solar S1
panels
P2
P1
S2
P3
D2
D1
Q1 Q2
20.
21. Evaluate the argument for
government intervention in the
market for solar panels to encourage
the growth of renewable energy
rather than allowing free market
forces to operate
22. The case for solar subsidies
Promotes renewable energy and
lowers oil dependency
Creates thousands of new jobs – + a
positive multiplier effect
Cuts bills for consumers & councils
Economies of scale if the take-up of
panels increases
23. Solar subsidies – critical evaluation
Subsidies benefit richer households
Limited effectiveness for money
spent – opportunity cost
Mis-selling of solar panels especially
to vulnerable households
Most solar panels are imported
