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Chapter 2

ECON-2086EL Chapter Notes - Chapter 2: Market Failure, Perfect Competition, Imperfect Competition

Economics / Science Èconomique
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Chapter 2 Is there suh thig as a free
Copetitie Vie
Why Free Markets Matter
The example used in this section is potatoes people enjoy potatoes and gain satisfaction from each
additional potato they acquire. At some point, the satisfaction diminishes and become less satisfying.
That is, a person only enjoys the potato with respect to the price.
Economists assume people are rational and will cease to buy potatoes at a point where the benefits of
buying said potato exceed the cost of purchasing it.
People stop buying a good when the marginal benefit = the price. As well, people stop buying when the
marginal cost = price. Therefore, the marginal benefit = marginal cost principle.
The market will come to an equilibrium when the consumer only demands what their marginal benefit
tells them to with respect to the price. If we let the consumers and the market act freely, we call is
Laissez Faire hih loosely eas let it e.
Possible Market Failures
- People do not know what is good or bad for them for example over indulgence in french-fries
can lead to health issues
- External costs such as pollution from the market can harm the people, plants, and living things
no buyer or seller has incentive to consider external costs
- Some externalities such as increased education, vaccination, or pest control increases the
marginal benefit of the consumer but is not accounted for
- Knowledge can be free-ridden on which means that people in society wait for others to
invent/learn something and free-ride on the idea
- Asymmetric information when the buyer and the seller have off-set knowledge of a good or
- Monopoly or Oligopoly when there is a single seller or a few large sellers of a good or service
that charges above the normal cost of production and keep price high lower output and higher
prices from monopolists keep consumption low
Governments can be used to regulate or intervene when market failures are occurring such as
informing the consumer, reducing (taxing) pollution, vaccination, health advancements, increased
education, regulations to diminish asymmetric information, and rules that would disallow from
monopolies or oligopolies
On the other hand, when a government intervenes it can harm the market subsidies or increased
output in certain markets can cause over consumption. As well, the government may find special
interest in a good/service and inevitably create a monopoly themselves
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