Suggested Answers of BT2 Revision Package - ASKnLearn

Therefore the market is said to be inefficient when the socially optimal amount of educationQ * is not achieved due to an under-consumption of education from society’s point of view,and this results in market failure.Costs/Benefits MPC = MSC MEB A B C MSB MPB Q p Q * Qty (Education) In the air travel market, consumers only take into account of their own private benefits offlying. These private benefits can be in terms of the satisfaction from flying, and the feelgood factor from going on a holiday, or even to businessmen where the benefits of flying isimmense, it can make a difference between closing a multi-billion dollar deal overseas.Again we assume that there are no externalities in the production of air travel.However these consumers fail to take into account the external costs of flying, such as thepollution and noise generated to the local and global community. In other words, theyoverestimate the benefits of flying. In this case we see that MSB = MPB – MEC. Again thereis a divergence between the MSB and MPB. Looking at Figure 2, individuals only equateMPB and MPC, and consume up to a level of Q p, where obviously the socially optimal level islesser at Q * if the external costs are taken into account. The over-consumption of flyingresults in a deadweight loss (ABC) to society. The market is inefficient as the overconsumption of flying results in wastage of resources, and this results in market failure.