ECON1001 Lecture Notes - Lecture 2: Perfect Competition, Market Failure, Mira-Bhayandar Municipal Corporation

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Perfect information: buys and sellers have full information, they are not deceived or ignorant. Perfect competition: there are many buyers and sellers, where no one holds a market power. Private homogenous goods- that is rivalrous and excludable. Market failure is where one of the conditions for a perfect competitive market is broken down. An externality is a cost or benefit accrued to a third party who is not involved in the market transactions. In a competitive free market mb=mc however the presence of external costs or benefit means supply is no longer balanced with demand -negative outcome. In a competitive market the private costs are the social costs. However in an externality social costs differ to the private costs and are external to the transaction. Negative production externality: contraction in supply to bring in costs associated with the good. Dwl above demand line and in-between supply lines. Negative consumption externality: contraction in demand to include the value of costs.

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