demand Explain the law of supply What are the determinants o

demand? Explain the law of supply. What are the determinants of supply? Use this Discussion Forum to ask questions and post your own thoughts relating to the week\'s chapter assignments. Also, feel free to post questions and interesting ècononics issues that you come across in the daily media. It is important that we learn to relate the academic information from the class to the real world around us. Ch. 4 Market Failures: Public Goods and Externalities. Suggested discussion topics: What TWO: SSION FORUM consumer surplus? What is producer surplus? What are the characteristics of public goods? 18 18 Ch. 5 Government\'s Role and Government Failure. Suggested discussion topics: Principal- agent problems. Special-interest effect. Ch. 6 Elasticity. Suggested discussion topics: What is elasticity in economics? How is the charging of different groups of customers different prices related to elasticity? Use this Discussion Forum to ask questions and post your own thoughts relating to the week\'s chapter assignments. Also, feel free to post

Solution

4. Market failure is an economic situation where free market allocation of goods and services is inefficient and that leads to a social welfare loss or, deadweight loss.

In case of public good, it has both the non excludability and non rivalry property. So, public good causes free rider problem because there is a tendency among people to get benefitted from these goods without paying for the cost. This free rider problem leads to under production of public good because no seller would be benefitted and able to make profit from selling these goods as people have no intention to pay for it. Therefore, public good causes market failure because people want it, but sellers are not able to provide it.

Externality (positive or negative externality) causes market failure because private market equilibrium doesn\'t match socially optimal equilibrium i.e when price mechanisms doesn\'t take into account full social cost and social benefit of production and consumption. This leads to inefficient production of Goods And services and that leads to market failure.

• Consumer surplus- It is the difference between amount that the consumer is willing to pay (it is shown by the intersection of demand curve on price axis) and what they are actually paying (market price). Therefore, Consumer surplus is the area above market price and below demand curve.

Producer surplus - Producer surplus is the difference between the actual amount producers are receiving from selling a good (market price) and the amount at which they are willing and able to sell (shown by the supply curve). P.S is the area above supply curve and below market price level.

• Characteristics of public goods - I) Non excludable - It is not possible to exclude individual from getting benefitted from the good.

II) non rivalry - One person\'s consumption doesn\'t reduce the amount available to others.

III) Public goods create free rider problem and under production of the good.