![]() ![]() The total size of the sum of the consumer and producer surpluses (social surplus) is maximised. ![]() It is only when the market is in equilibrium (supply = demand in a free market) that an allocatively efficient outcome is achieved by the market. In general terms, marginal cost at each level of production includes any additional costs required to produce the next unit – the value of the resources used to produce that additional unit. Marginal cost is the change in the total cost that arises when the quantity produced is incremented by one unit, that is, it is the cost of producing one more unit of a good. Allocative efficiency is achieved when the price of the next unit of consumption is equal to the marginal cost of production. The value that consumers place on the consumption of the next unit (marginal unit of output) of a particular good or service is reflected in the price of that product. That is, there exists another conceivable outcome where an individual may be made better-off without making someone else worse-off at the same time.Īllocative efficiency is a state of the economy in which production represents consumer preferences in particular, every good or service is produced up to the point where the last unit provides a marginal benefit to consumers equal to the marginal cost of producing. ![]() In economics, market failure is a situation in which the allocation of goods and services is not allocatively efficient. Evaluate, using diagrams, the use of government responses, including subsidies, legislation, advertising to influence behaviour, and direct provision of goods and services.Explain that merit goods are goods whose consumption creates external benefits.Explain, using diagrams and examples, the concepts of positive externalities of production and consumption, and the welfare loss associated with the production or consumption of a good or service.Evaluate, using diagrams, the use of policy responses, including market-based policies (taxation and tradable permits), and government regulations, to the problem of negative externalities of production and consumption.Explain that demerit goods are goods whose consumption creates external costs.Explain, using diagrams and examples, the concepts of negative externalities of production and consumption, and the welfare loss associated with the production or consumption of a good or service.Describe the meaning of externalities as the failure of the market to achieve a social optimum where MSB = MSC.Describe the concepts of marginal private benefits (MPB), marginal social benefits (MSB), marginal private costs (MPC) and marginal social costs (MSC).Analyse the concept of market failure as a failure of the market to achieve allocative efficiency, resulting in an overallocation of resources (overprovision of a good) or an under-allocation of resources (under-provision of a good). ![]()
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