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Lecture 4

ECON101 Lecture Notes - Lecture 4: Deadweight Loss, Avoidance Speech, Economic Equilibrium


Department
Economics
Course Code
ECON101
Professor
Corey Van De Waal
Lecture
4

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4.5 Market Failures
Introduction to Market Failures
- Market failure occurs when a good/service is under or over-
produced
- Underproduction
o The market produces fewer goods/services when compared
to the competitive market equilibrium
o Consumer surplus shrinks and so does the producer surplus
so, total surplus diminishes
o The resulting allocation does not achieve allocative
efficiency deadweight loss to society
o Deadweight loss: decrease in total surplus
- Overproduction
o The market produces more goods/services when compared
to the competitive market equilibrium
o Resources are wasted
o The resulting allocation does not achieve allocative
efficiency deadweight loss to society social loss occurs
Sources of Market Failure
- Price and Quantity Regulations
o Price regulations that limit the max. price that firms can
charge for their goods put a block on the equilibrium price
adjustments and lead to underproduction
o Price regulations that limit the min. wage that workers can
be paid for their labour put a block on the equilibrium price
adjustments and lead to unemployment
o Quantity regulations that limit the amount that a firm is
permitted to produce also lead to underproduction
- Taxes and Subsidies
o Taxes increase the prices paid by buyers and lower the
prices received by sellers taxes decrease the quantity
produced and lead to underproduction
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