MAE101 Lecture Notes - Lecture 10: Oligopoly, Smog, Market Power

• School: Deakin University
• Department: Business and Law
• Course: MAE101
• Professor: Ratcliffe

Document Summary

Market failure = when the market mechanism does not produce the optimal level of output. Public goods (unable to exclude non-players e. g. defence) Merit goods (everyone should have access e. g. schools) Externalities: the u(cid:374)(cid:272)o(cid:373)pe(cid:374)sated i(cid:373)pa(cid:272)t of o(cid:374)e perso(cid:374)"s a(cid:272)tio(cid:374)s o(cid:374) the (cid:449)ell-being of a bystander: negative externality = the effect on bystanders is adverse, positive externality = the effect on bystanders is beneficial. Not adequately reflected in the market price, therefore. The equilibrium market price is not equal to marginal social benefit or marginal social cost, and. Pollution: positive externality = research creates knowledge others (cid:272)a(cid:374) use. The market equilibrium maximises both consumer and producer surplus. The demand curve shows a buyers wtp, and the supply curve shows the costs of sale. However in the presence of externalities, this may differ. Supply curve = private costs of a firm. Blue line represents supply curve without externalities. In this case the external cost is equal to per gallon.