ECON-1006EL Chapter Notes - Chapter 16: Market Failure, Rational Ignorance, Allocative Efficiency

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rubygoose773

23 May 2018

School

Laurentian

Department

Economics / Science Èconomique

Course

ECON-1006EL

Professor

Eastman

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Chapter 16: Market Failures and Government Intervention

Definitions

Market failure

Failure of the unregulated market system to achieve allocative efficiency

Externality (third party

effects)

An effect on parties not directly involved in the production or use of a

commodity

Private cost

The value of the best alternative use of resources used in production as

valued by the producer

Social cost

The value of the best alternative use of resources used in production as

valued by society

Rivalrous

A good or service is rivalrous if one person’s consumption of it reduces

the amount available for others

Excludable

A good or service is excludable if its owner can prevent others from

consuming it

Private goods

Good or services that are both rivalrous and excludable

Common-property resource

A product that is rivalrous but not excludable

Public goods (collective

consumption goods)

Goods or services that can simultaneously provide benefits to a large

group of people.

Asymmetric information

A situation in which one party to a transaction has more or better

relevant information about the transaction than the other party

Moral hazard

A situation in which an individual or a firm takes advantage of special

knowledge while engaging in socially inefficient behavior

Adverse selection

Self-selection, within a single risk category, of persons of above-average

risk

Paternalism

Intervention in the free choices of individuals by others (including

governments) to protect them against what is presumed to be their own

ignorance or folly

Cost-benefit analysis

An approach for evaluating the desirability of a given policy, based on

comparing total (opportunity) costs with total benefits.

Rent seeking

Behaviour whereby private firms and individuals try to use the powers

of the government to enhance their own economic well-being in ways

that are not in the social interest

Rational ignorance

When agents have no incentive to become informed about some

government policy because the costs of becoming informed exceed the

benefits of any well-informed action the agent might take

Key Points

• The operative choice is not between an unhampered free-market economy and a fully

centralized economy. It is rather the choice of which mix of markets and government

intervention best suits people’s hopes and needs.

• When the government’s monopoly of violence is secure and functions with effective

restrictions against its arbitrary use, citizens can safely carry out their ordinary economic

and social activities.

• Market fail describes a situation in which the free-market, in the absence of government

intervention, fails to achieve allocative efficiency.

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Document Summary

Common-property resource a product that is rivalrous but not excludable. Failure of the unregulated market system to achieve allocative efficiency. An effect on parties not directly involved in the production or use of a commodity. The value of the best alternative use of resources used in production as valued by the producer. The value of the best alternative use of resources used in production as valued by society. A good or service is rivalrous if one person"s consumption of it reduces the amount available for others. A good or service is excludable if its owner can prevent others from consuming it. Good or services that are both rivalrous and excludable. Goods or services that can simultaneously provide benefits to a large group of people. A situation in which one party to a transaction has more or better relevant information about the transaction than the other party.

Related Questions

1. A consequence of the economic problem of scarcity is that:

a. Choices have to be made about how resources are used.

b. There is never too much of any good or service produced.

c. The production of goods and services must be controlled by the government.

d. The production-possibilities curve is bowed outward.

2. Microeconomics is concerned with issues such as:

a. The level of inflation in the economy

b. The demand for bottled water by individuals.

c. Maintaining a strong level of economic growth.

d. All of the choices.

3. In economics, scarcity means that:

a. A shortage of a particular good will cause the price to fall

b. A production possibilities curve cannot accurately represent the tradeoff between two goods.

c. Society's desires exceed the want-satisfying capability of the resources available to satisfy those desires.

d. The market mechanism has failed

4. A city's decision to limit smoking in public areas is an example of

a. The invisible hand at work.

b. The market mechanism at work.

c. Market failure.

d. Government intervention

brownsea-lion330

Adam Smith usually referred to as the father of Economics expounded the theory of free markets and opposed any form of concentration of economic power. He believed that any authority establishing a price that provided a fair price to the providers of the factors of production would distort the market's natural ability to determine prices and output levels. In general, he believed that competitive markets would allocate resources to their highest and best use. However, in recent times, we have seen the market mechanism fail and allocate too many or too few resources to the consumption or production of some goods and services.

-What are some of the reasons for this failure? -Has government intervention into competitive markets changed the efficiency of these markets? Why or why not?

-Was Smith correct or incorrect in his theories concerning the efficiency of the markets in the allocation of resources?

Support your answers with examples and references. Justify your choices with valid assumptions and logically driven arguments.

sangriahorse340

Question 3

We saw in class that the same good can fall in different categories (public/private/club/common resource) depending on circumstances. An example of such a good would be watching a movie at the theater. If a lot of people want to watch it, the movie is a _________. If very few people want to watch it (to the point where a room could not even be filled), the movie is likely to be a _______.

A. a common resource; a public good

B. a public good; a common resource

C. a private good; a club good

D. a club good; a private good

3 points

Question 4

Which of the following statements about the free-rider problem is not true?

A. Individuals have an incentive to free-ride when the good is not excludable.

B. The kinds of goods for which the free rider problem arises are common resources and public good.

C. Markets for goods for which there is a free-rider problem are inefficient because not enough of the good is produced.

D. Goods for which the free-rider problem exists tend to be over provided relative to what would be optimal.

4 points

Question 5

To achieve the efficient provision of public goods, the

A. market should be allowed to operate without government intervention.

B. government must limit the provision of those goods.

C. government must tax producers of those goods.

D. government must either provide those goods or subsidize their production.

3 points

Question 6

Which of the following statements about public goods is not true?

A. Because people cannot be excluded from their consumption and thus have no incentive to pay for them, public goods are underprovided by the market.

B. Efficiency requires that the government provide or fund (subsidize) the provision of all public goods.

C. Efficiency requires that the government provide or fund only the public goods that create more benefits than costs to society.

D. In reality, it is hard to provide public goods efficiently.

3 points

Question 7

Public goods must be provided by the government as the market on its own will fail to provide them. However, even with government provision it is very hard to achieve efficiency. Why?

A. In reality, it is very hard (if not impossible) to accurately estimate the benefits of providing a public good.

B. A. In reality, there can be overruns in the cost of providing the public good.

C. Government decisions about which public goods to provide can be influenced by lobbying by interest groups.

D. All of the above are true.

4 points

Question 8

Which of the following is not a common resource?

A. congested roads

B. clean water

C. wild life, which hunters want to hunt and others want to view.

D. a fireworks display.

3 points

Question 9

Many species of animals must be protected by law to keep them from extinction. Why are cows not one of these endangered species even though there is such a high demand for beef?

A. Cows reproduce at a high rate and have adapted well to their environment.

B. Public policies protect cows from predators and diseases.

C. Cows are privately owned (private goods), whereas many endangered species are owned by no one (common resources).

D.There is a natural ecological balance between the birth rate of cows and human consumption.

3 points

Question 10

Which of the following statements about common resources is not true?

A. Due to the free-rider problem, common resources tend to be overused.

B. Because there is rivalry in the consumption of common resources, whenever one person uses a common resource it is imposing a negative externality on others who might also want to use it.

C. There are no private solutions to the management of common resources.

D. One of the solutions that ensures that common resources are properly managed is their privatization.

3 points

Question 11

In our analysis of the firmâs behavior and goals, when we talk about cost, we include _________, and when we talk about profit, we mean ________.

A. Explicit costs only; economic profit

B. Implicit costs only; economic profit

C. Implicit costs only; accounting profit

D. Explicit + implicit costs; economic profit

E. Explicit + implicit costs; accounting profit

3 points

Question 12

One of the differences between explicit and implicit costs is that

A. explicit costs must be greater than implicit costs.

B. explicit costs do not require a direct monetary outlay, whereas implicit costs do.

C. implicit costs do not require a direct monetary outlay, whereas explicit costs do.

D. implicit costs must be greater than explicit costs.

3 points

Question 13

Which of the following is FALSE:

A. If accounting profit is zero, then economic profit is negative

B. Economic profit takes cost the opportunity cost of time and capital into account

C. Economic Profit = Accounting Profit + Implicit Cost

D. Economic Profit = Accounting Profit â Implicit Cost

3 points

Question 14

Which of the following is an example of an implicit cost?

(i) the owner of a firm forgoing an opportunity to earn a large salary working in Wall Street

(ii) interest paid on the firm's debt

(iii) rent paid by the firm to lease office space

A. (ii) and (iii) only

B. (i) and (iii) only

C. (i) only

D. (iii) only

3 points

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ECON-1006EL Chapter Notes - Chapter 16: Market Failure, Rational Ignorance, Allocative Efficiency

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