Summary

Externalities are caused when social benefits / costs are different to private benefits / costs

Positive externalities occur where social benefits are greater than private benefits

Negative externalities occur where social costs are greater than private costs

Cost benefit analysis looks at the costs and benefits of producing / consuming a product

Public goods are goods that are provided by the government e.g. street lighting

Merit goods are where social benefits exceed social costs e.g. healthcare the government encourages people to use these

Demerit goods are where social costs exceed social benefits e.g. smoking the government discourages people to use these through taxation

Market imperfections can be caused by monopolies, imperfect market knowledge and factor immobility which can result in misallocation of resources

Inequalities in wealth and income distribution may result in a misallocation of resources as the rich consume more

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