Free markets are powerful but sometimes allocate resources poorly. Economists call these cases market failure.
🏭 Externalities
An externality is a cost or benefit imposed on a third party. With a negative externality in production (pollution), social cost = private cost + external cost, so the market over-produces. With a positive externality in consumption (education, vaccination), social benefit = private benefit + external benefit, so the market under-produces. Policies: Pigouvian taxes (a tax equal to the external cost), subsidies, regulation, tradable permits, and property rights (Coase).
private cost $20, external cost $8 → social cost $28
carbon tax = external cost per unit
vaccine: private benefit $30, external benefit $20 → social benefit $50
🖼️ See it
Because the firm ignores the harm it causes others, the market produces too much (5 instead of 4).
🧩 Other market failures
Public goods are non-excludable and non-rival, so private firms under-provide them because of the free-rider problem (street lights, national defence). Information asymmetry (sellers know more than buyers, as in used cars or insurance) leads to adverse selection and moral hazard. Monopoly power restricts output. Common resources (fish stocks) suffer the tragedy of the commons when overused.
public good: non-excludable and non-rival
common resource: non-excludable but rival
club good: excludable but non-rival
private good: excludable and rival
Classify by two questions: Can you stop people using it? Does one person’s use reduce another’s?
✏️ Quick check · 1 of 7
Externality
A negative externality in production leads to:
Hidden costs.
✏️ Quick check · 2 of 7
Pigouvian tax
A Pigouvian tax is set equal to:
External cost.
✏️ Quick check · 3 of 7
Public good
A public good is:
Everyone shares.
✏️ Quick check · 4 of 7
Free rider
A free rider:
Gets a free benefit.
✍️ Type your answer · 5 of 7
Private cost is $20 per unit and external cost is $8 per unit.
What is the social cost per unit, in $?
Enter an exact answer, without rounding.
$
Add.
✍️ Type your answer · 6 of 7
A vaccine’s private benefit is $30 and external benefit $20.
What is the social benefit, in $?
Enter an exact answer, without rounding.
$
Add.
✍️ Type your answer · 7 of 7
A factory makes 1000 units and the external cost is $8 each. A Pigouvian tax equals the external cost.
How much tax revenue is raised, in $?
Enter an exact answer, without rounding.
$
Tax × units.
📝 Lesson quiz · 5 questions
0 / 5
Re-read the lesson, then give it another go.
Question 1 of 5
A club good is:
Question 2 of 5
Adverse selection occurs when:
Question 3 of 5
The tragedy of the commons arises because:
Question 4 of 5
Tradable permits work by:
Question 5 of 5
Which would encourage a positive externality?
Lesson 2 · Microeconomics
🥇 Perfect Competition & Monopoly
Market structure decides prices, output and efficiency. The extremes are perfect competition and monopoly.
🌾 Perfect competition
Many buyers and sellers, identical products, free entry and exit and full information. Firms are price takers with MR = P. In the short run they can earn abnormal profit; entry then drives price down until P = average cost in the long run, with normal profit. Output is both allocatively efficient (P = MC) and productively efficient (minimum average cost).
long run: P = MC = minimum AC
profit = (P − AC) × Q = 0 extra
price 12, AC 10, Q 100 → abnormal profit $200 → new firms enter
🖼️ See it
A monopoly can restrict output and charge more than a competitive market would, which is why governments regulate them.
👑 Monopoly
A monopolist is the sole seller with barriers to entry (patents, economies of scale, control of resources, legal licences). It faces the whole demand curve, so to sell more it must cut the price; therefore MR < P. It maximises profit at MR = MC, charging a higher price and producing less than in competition. This causes a deadweight loss. A monopoly may bring economies of scale, R&D and, with price discrimination, can serve more customers.
demand P = 20 − Q → TR = 20Q − Q² → MR = 20 − 2Q
MC = 4 → 20 − 2Q = 4 → Q = 8, P = 12
competitive output at P = MC: 20 − Q = 4 → Q = 16
deadweight loss: output restricted from 16 to 8
Monopolists restrict output to raise price. That is why regulators watch them.
✏️ Quick check · 1 of 7
Price taker
In perfect competition a firm’s MR equals:
Constant.
✏️ Quick check · 2 of 7
Entry
Abnormal profit in perfect competition leads to:
Profits attract.
✏️ Quick check · 3 of 7
Barrier
Which is a barrier to entry?
Blocks rivals.
✏️ Quick check · 4 of 7
Monopoly output
Compared with competition, a monopoly usually has:
Restricts.
✍️ Type your answer · 5 of 7
Demand is P = 20 − Q and MC = 4, with MR = 20 − 2Q.
What output maximises monopoly profit (MR = MC)?
Enter an exact answer, without rounding.
Set MR = MC.
✍️ Type your answer · 6 of 7
At the monopoly output Q = 8 on P = 20 − Q.
What price does the monopolist charge, in $?
Enter an exact answer, without rounding.
$
Read it off the demand curve.
✍️ Type your answer · 7 of 7
Price is 12, average cost is 10 and output is 100.
What is the abnormal profit, in $?
Enter an exact answer, without rounding.
$
(P − AC) × Q.
📝 Lesson quiz · 5 questions
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Question 1 of 5
Allocative efficiency occurs where:
Question 2 of 5
Productive efficiency occurs at:
Question 3 of 5
A monopoly’s MR is below price because:
Question 4 of 5
Price discrimination means:
Question 5 of 5
A natural monopoly arises when:
Lesson 3 · Microeconomics
⚖️ Government Intervention
When markets fail, governments can step in, but intervention also has costs and can fail.
🛠️ Tools of intervention
Tools: taxes (indirect taxes shift supply left), subsidies (shift supply right), price controls (maximum prices cause shortages; minimum prices cause surpluses), regulation, nationalisation or privatisation, direct provision of goods and information campaigns. A tax’s incidence (who bears it) depends on elasticity: the less elastic side bears more.
tax $2 per unit; demand inelastic, supply elastic
consumers pay $1.50 more, producers absorb $0.50
subsidy $3 per unit × 1000 units = $3000 cost to government
🖼️ See it
With the price held at 6, buyers want 7 units but sellers offer only 3, leaving a shortage of 4.
🧐 Government failure
Government failure occurs when intervention makes things worse: unintended consequences (rent controls cut housing supply), information problems (planners do not know true costs), regulatory capture (industries influence regulators), administrative costs and political short-termism. A good policy has clear objectives, targets the failure directly and is checked by cost–benefit analysis.
cost–benefit: benefits $120 m, costs $90 m → net benefit $30 m
benefit–cost ratio = 120 / 90 ≈ 1.33
Compare the market failure with the likely government failure. Sometimes the cure is worse than the disease.
✏️ Quick check · 1 of 7
Subsidy
A subsidy to producers causes the supply curve to:
More supplied.
✏️ Quick check · 2 of 7
Incidence
Who bears more of a tax when demand is inelastic?
Less flexible side.
✏️ Quick check · 3 of 7
Rent control
Rent controls below the market rate often lead to:
Price ceiling.
✏️ Quick check · 4 of 7
Capture
Regulatory capture is when:
Regulators are influenced.
✍️ Type your answer · 5 of 7
A subsidy of $3 per unit is paid on 1000 units.
What is the total cost to government, in $?
Enter an exact answer, without rounding.
$
Multiply.
✍️ Type your answer · 6 of 7
A project has benefits of $120 million and costs of $90 million.
What is the net benefit, in $ million?
Enter an exact answer, without rounding.
$ m
Subtract.
✍️ Type your answer · 7 of 7
A $2 per unit tax is raised and consumers bear $1.50 of it.
How much do producers bear per unit, in $?
Enter an exact answer, without rounding.
$
Subtract.
📝 Lesson quiz · 5 questions
0 / 5
Re-read the lesson, then give it another go.
Question 1 of 5
A maximum price below equilibrium creates:
Question 2 of 5
Privatisation is:
Question 3 of 5
Cost–benefit analysis compares:
Question 4 of 5
An indirect tax is paid:
Question 5 of 5
Which is an unintended consequence?
Lesson 4 · Public economics
📊 Inequality & Redistribution
Markets reward productivity and ownership unequally. Societies decide how much inequality is acceptable.
📉 Measuring inequality
A Lorenz curve plots the cumulative share of income against the cumulative share of people; the further it bows from the 45° line, the greater the inequality. The Gini coefficient = area between the line and the curve ÷ area under the line (0–1). Quintile ratios compare the top 20% with the bottom 20%. Income flows differ from wealth stocks; wealth is more unequal. Relative poverty is below 60% of median income; absolute poverty is below a fixed line.
top 20% earn 50%, bottom 20% earn 5% → ratio 50 / 5 = 10
median income $30 000 → relative poverty line = 0.6 × 30 000 = $18 000
🖼️ See it
The more the curve bows away from the diagonal, the higher the Gini coefficient.
🧭 Causes and policies
Causes: differences in skills and education, inherited wealth, discrimination, technology that rewards high skill, weaker unions and globalisation. Policies: progressive taxes, benefits and a minimum wage, education and training, and universal public services. Equity–efficiency trade-off: very high taxes may weaken incentives, but evidence suggests moderate redistribution need not slow growth. Universal basic income is debated.
Equality of opportunity vs outcome. Policies can target either and disagree on which matters more.
✏️ Quick check · 1 of 7
Gini
The Gini coefficient is higher when:
Larger is more unequal.
✏️ Quick check · 2 of 7
Relative poverty
Relative poverty is defined against:
Compared with others.
✏️ Quick check · 3 of 7
Progressive
A progressive tax system:
Rising rate.
✏️ Quick check · 4 of 7
Wealth
Wealth is:
Owned things.
✍️ Type your answer · 5 of 7
The median income is $30 000.
What is the 60% relative poverty line, in $?
Enter an exact answer, without rounding.
$
60% of 30 000.
✍️ Type your answer · 6 of 7
The top 20% earn 50% of income and the bottom 20% earn 5%.
What is the quintile ratio?
Enter an exact answer, without rounding.
Divide.
✍️ Type your answer · 7 of 7
Tax is 20% up to $40 000 and 40% above. Income is $60 000.
What is the total tax, in $?
Enter an exact answer, without rounding.
$
Apply each band.
📝 Lesson quiz · 5 questions
0 / 5
Re-read the lesson, then give it another go.
Question 1 of 5
A Lorenz curve far from the 45° line shows:
Question 2 of 5
Which policy tackles inequality of opportunity?
Question 3 of 5
Technology can raise inequality because it:
Question 4 of 5
The equity–efficiency trade-off suggests that:
Question 5 of 5
Universal basic income is:
Lesson 5 · Macroeconomics
📈 Aggregate Demand & Supply
The AD–AS model explains output, prices and unemployment in the whole economy.
➡️ AD and its shifts
Aggregate demand (AD) = C + I + G + (X − M), sloping down because of the wealth effect, interest-rate effect and exchange-rate effect. AD shifts right with higher consumer confidence, lower interest rates, government spending, tax cuts, foreign demand or a weaker currency. Consumption depends on disposable income: C = a + bYd, where b is the MPC.
In the long run output is fixed by the economy’s capacity (LRAS); demand and short-run supply decide the price level.
⬅️ AS and equilibrium
Short-run aggregate supply (SRAS) slopes upward as wages and some prices are sticky; long-run aggregate supply (LRAS) is vertical at potential output (full employment). AD above potential creates an inflationary gap; below creates a recessionary gap with unemployment. Supply-side policies (education, infrastructure, deregulation) shift LRAS right. A supply shock (oil price spike) shifts SRAS left: stagflation.
potential output $1000 bn; actual output $950 bn → output gap = −$50 bn (recessionary)
actual $1040 bn → +$40 bn (inflationary gap)
Demand shifts cause price and output to move together; supply shocks make them move in opposite directions.
✏️ Quick check · 1 of 7
AD formula
Aggregate demand equals:
Four parts.
✏️ Quick check · 2 of 7
LRAS
The LRAS curve is vertical because:
Capacity.
✏️ Quick check · 3 of 7
Stagflation
An oil price shock shifts SRAS:
Costs rise.
✏️ Quick check · 4 of 7
Supply-side
A supply-side policy is:
Raises potential output.
✍️ Type your answer · 5 of 7
C = 50 + 0.8 Yd and Yd = 400.
What is C?
Enter an exact answer, without rounding.
Put Yd into the equation.
✍️ Type your answer · 6 of 7
Potential output is $1000 bn and actual output is $950 bn.
What is the output gap, in $ bn? (negative if below potential)
Enter an exact answer, without rounding.
$ bn
Actual minus potential.
✍️ Type your answer · 7 of 7
MPS = 0.2.
What is the multiplier?
Enter an exact answer, without rounding.
1 ÷ MPS.
📝 Lesson quiz · 5 questions
0 / 5
Re-read the lesson, then give it another go.
Question 1 of 5
A recessionary gap has:
Question 2 of 5
Which shifts AD right?
Question 3 of 5
An inflationary gap means:
Question 4 of 5
MPS stands for:
Question 5 of 5
Which policy shifts LRAS right?
Final Challenge
🏆 10-Question Challenge Quiz
Questions from every topic in this course. Pick an answer for each one, then hit Check My Answers.
0 / 10
💪 Keep practicing — go back through the lessons and retake the quiz!
Q1 · Market Failure & Externalities
Why are public goods under-provided by private firms?
Q2 · Market Failure & Externalities
Which would encourage a positive externality?
Q3 · Perfect Competition & Monopoly
The deadweight loss of a monopoly is the:
Q4 · Perfect Competition & Monopoly
A natural monopoly arises when:
Q5 · Government Intervention
Government failure means that:
Q6 · Government Intervention
Which is an unintended consequence?
Q7 · Inequality & Redistribution
Which measure shows how unequal a country’s income distribution is?