Market failure occurs when the market mechanism leads to the misallocation of scarce resources within an economy, leading to none or the wrong quantity of a good or service being supplied. More often than not, demerit goods induce negative externalities through its consumption, which are costs to third parties and where the social cost of consumption is greater than the private cost of consumption. Demerit goods are overproduced, largely due to asymmetric information leading to unjust pricing. The MSC > MPC resulting in a price drop, increasing demand, assuming the law of demand holds true. The shaded area on my graph represents the additional cost to society as a result of consumption of the good, with the cost being P2P3.
Market failure occurs when the market mechanism leads to the misallocation of scarce resources within an economy, leading to none or the wrong quantity of a good or service being supplied. More often than not, demerit goods induce negative externalities through its consumption, which are costs to third parties and where the social cost of consumption is greater than the private cost of consumption. Demerit goods are overproduced, largely due to asymmetric information leading to unjust pricing. The MSC > MPC resulting in a price drop, increasing demand, assuming the law of demand holds true. The shaded area on my graph represents the additional cost to society as a result of consumption of the good, with the cost being P2P3.