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Chapter 7

ECON-2086EL Chapter Notes - Chapter 7: World Health Organization, Externality

Economics / Science Èconomique
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Chapter 7 Part II- Market Failure: The
Regulatory Solution and the Costs of
Too Big to Fail: Banking
The Great Depression that occurred in 1929 was caused by banks making risky moves and failing. This
caused the banks to fail using the hard-earned money of the general population. The government
implemented the Banking Act in 1933 that required banks to avoid risky investments (USA). However,
the Glass-Steagall act was overturned in 1999 due to heavy lobbying. The new GLBA act allowed banks
to engage in risky activities that had previously been barred. This led to the collapse of the banks again
in 2008-2009 when they bet heavily on the US housing market.
Negative Externalities: Cancer
Negative externalities occur when the third party (neither the producer or consumer) is heavily affected
by the production of a good or service. Cancer has been on the rise in modern world. The World Health
Organization states that 80% of cancer cases are caused by the environment. People are exposed to
carcinogens that are dumped in the earth, water, and air by way of pollution from production. Calls for
regulation that would take the costs off of the public (the third party, hospitals, and government) and
force the firms (private sector) to internalize the externalities.
Positive Externalities: Innovation
Positive externalities occur when the public benefits from the actions of another party. The free market
calls for deregulation that allows firms to innovate. However, many innovations have been made by the
government and not the private firms. Private firms do not usually invest in R&D due to the high costs
and long timelines. They rather appeal to the shareholders and payout now rather than invest for later.
The only way firms will innovate is if they are protected in someway or another (such as patents).
Information Asymmetry
Asymmetric information occurs when the one party of a transaction has more information than the
other this results in one party not knowing the benefits, harms, or utility of the transaction. Drugs can
contain information asymmetry when the consumer (patient) does not know the positive or negative
effects of drugs they are taking. Government regulation is required to ensure high levels of testing,
prescription methods, and making the side effects known to the patient. By forcing the companies to
abide by these rules an disclose this information, it minimizes the asymmetric information and increases
the knowledge of the consumer.
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