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[ECON 110] - Final Exam Guide - Comprehensive Notes for the exam (97 pages long!)


Department
Economics
Course Code
ECON 110
Professor
Ian James Cromb
Study Guide
Final

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Queen's
ECON 110
FINAL EXAM
STUDY GUIDE

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Economics 110b Notes Textbook
Ch. 16: Market Failures and Government
Intervention
The Operative choice is not between an unhampered free-market economy and a fully
centralized command economy. It is rather the choice of which mix of markets and government
intervention best suits peoples hopes and needs.
16.1 Basic Functions of Government
When the governments monopoly of violence is secure and functions with effective restrictions
against its arbitrary use, citizens can sagely carry out their ordinary economic social activities.
16.2 The Case for Free Markets
The Informal defence of free markets is based off 3 arguments:
1. Free markets provide automatic coordination of the actions of decentralized decision
makers.
2. The pursuit of profits in free markets provides a stimulus to innovation and rising material
living standards.
3. Free markets permit a decentralization of economic power.
Automatic Coordination
Defenders of Market Economies
-Argue they're more flexible and adjust quickly to changes
ex. price of oil rises
some households may cut down on house temperature
some may cut down on driving
some may give up on air conditioning
Innovation and Growth
-economy grows from new products and processes creating profits
-they attempt to allocate resources to successful innovations
-sometimes works in monopolized or imperfect markets through creative destruction
Decentralization of Power
-since trade is voluntary, power is constricted
-through competitors and new products
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16.3 Market Failures
Market failure describes a situation in which the free market, in the absence of government
intervention, fails to achieve allocative efficiency.
Market Power
-government policy tries to minimize DWL while encouraging innovation and productivity
growth
-governments use competition policy to prevent monopolistic practices
Externalities
Externality: An effect on parties not directly involved in the production or use of a commodity.
Also called “Third Party Effects.”
Private Cost: The value of the best alternative use of resources used in production as called by
the producer.
Social Cost: The value of the best alternative use of resources used in production as valued by
society.
Externalities
-occur when actions taken by firms directly impose costs or benefits towards others
ex. smoking in a restaurant affects everyone there
Private vs Social Costs
-private is faced by private decision makers
production costs, advertising costs, etc.
-social costs includes private cost (the decision maker is a member of society) but also
includes costs imposed on third parties
Discrepancies between private cost and social cost occur when there are externalities. The
presence of externalities, even when all markets are perfectly competitive, leads to allocatively
inefficient outcomes.
Fig 16-1
-externalities can be both positive and negative
-they arise in many different ways
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