Econ 1000 – Week 8 – Lecture 14
2 cases when markets fail
o When there is too much market power, like a monopoly. A
market will fail when market power is too centralized.
o Or when there is only one consumer buying.
o Externalities can also lead to market failure
o Externality: The private cost (supply curve represents this) also
adds an external cause through relation of production.
Social cost = private cost + external cost
The Market equilibrium, is the original equilibrium point (point of
intersection) on a supply and demand chart.
Market equilibriums are generally not social optimum.
Social optimum is when the marginal cost is the same as the private cost.
Social cost is when the marginal cost is the external cost added to the
The new equilibrium point with the social cost curve becomes the social
The net welfare loss is the triangle between the two equilibrium points
lined up on the q axis.
Self-interest leads to a pareto optimal market, sometimes.
The elasticity of the social cost curve depends on the elasticity of both
demand and supply.
Negative externality is where the b