What did Pigou suggest?
Pigou suggested social control measures and using subsidies and taxes to achieve an optimal allocation of resources in the face of various externalities. The government can interfere, in all cases, an external diseconomy of production for removing any divergence between social and private costs and benefits.
What is positive externality?
Positive externality is the optimistic spillover which is gained from the goods or service. For instance, while public education may directly affect only the schools and their students, an educated population will extend positive effects on the society as a whole.
What are the causes of market failure?
Following are some of the key reasons of a market failure. Positive and negative externalities: An externality is the effect on a third party which is usually caused by availing a particular good or service. Positive externality is the optimistic spillover which is gained from the goods or service.
How can a monopoly be controlled?
A monopoly power in the market can be controlled by the government by passing restrictive trade practice legislation and anti-monopoly laws. These regulations are targeted to remove unfair competition in the market, prevent iniquitous price discrimination and fixing prices that equal to competitive prices.
What are merit goods?
Healthcare, education, sports centers etc are considered as merit goods. Over provision of demerit goods: Demerit goods are just the opposite of merit goods, in that the society believes is over-consumed, mostly with negative externalities. These include alcohol, cigarette, drugs and similar things.
What is it called when someone deriving the benefits of a product or service without paying for it?
Someone deriving the benefits of a product or service, without paying for it, is called a free rider problem. Underproduction of merit goods: Merit goods are private sector products that the society believes is under-consumed. Healthcare, education, sports centers etc are considered as merit goods.
How does market failure affect the economy?
A market failure has a negative effect on the economy due to the non-optimal allocation of resources. In other words, the social cost to manufacture the goods or services i.e. all the opportunity costs of input resources used in the creation, are not minimized. This also leads to the wastage of resources.
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