We have been discussing market failure and externalities. The importance of understanding these things is so that stakeholders (businesses, governments, city planners etc) can allocate resources in order to produce the right amount of any given product or service.

First, here are a few important vocabulary terms: 

  • Externalities (When a 3rd party is directly affected by the good or service that they are not consuming or producing themselves, such as second hand smoke).
  • Merit Goods (good goods, that affect the person NOT consuming/producing the good such as medicines) These are often Public Goods.
  • Demerit Goods (bad goods such as pollution and cigarettes)

Another way to put it is that we want to maximize our utility (happiness) or “Equilibrium” level. It means that the perfect amount of the good or service is produced and consumed.

  • So for example, you eat a bite of ice cream, that first bite would taste the best. But then you eat another and another until you get to the point at which you are completely satisfied (the 9th bite). If you were to eat one more bite it (10) it would make you feel a bit sick. You would not consume another bite if it was to have a negative effect on you (therefore, make you feel ill) so your utility would be maximized at the 9th bite.
  • Inversely, if we do not produce or consume enough of something (say a vaccine for malaria) then we are not at equilibrium or the socially optimal level as there are still people who would  like the good or service but cannot get it. So we need the someone else to intervene and help, this is where the government comes in. They help subsidize the production of the merit good.

Your first assessment with be analyzing economic activities in order to identify the market failure, externalities and solutions to reach equilibrium:

You will need to take an article from the news ( maybe use one of these ) and using the topic of market failure, explain what the problem is (why the market has failed) and how the government could step in to solve the problem through the use of a subsidy or a tax.


1) Summarise what the main point of the article is – point out any controversy
2) Explain why the market is failing to be efficient (at equilibrium)
3) Identify the private and third party costs and or benefits
4) Identify the stakeholders in the market and explain if they are hurt or helped and why
5) Explain 2 or 3 possible solutions and evaluate how well they might work given the context of the situation. Evaluate which one is best suited to address the imbalance.
You may use a digram to explain your reasoning.

Judgments are made that are supported by effective and balanced reasoning.

  • Make judgments – be specific about what you think.

  • Support judgments with appropriate reasoning – explain why you came to that conclusion and mention the evidence you have for making assumptions or synthesising points.

Consider alternative points of view (be clear about specific stakeholders) or alternative outcomes to the ones you have discussed. Also support these alternatives or rank in order of priority/effectiveness. Give room for claims and their counterclaims.

Here is an example. 

In groups of 2: Pick a recent article depicting a market failure and analyze it using the 5 points above. You will present your findings to the class.

  • Presentations should be between 3 and 5 minutes long
  • You may record a video

Hyperlink your presentations here.

TSC (A, C, D)

Due date: Monday January 29th (2nd semester)