ECON 110 Chapter Notes - Chapter 16: Life Insurance, Rent-Seeking, Potato Chip

• School: Queen's University
• Department: Economics
• Course: ECON 110
• Professor: Ian James Cromb

Document Summary

404: a) cost for all products and the economy would be allocatively efficient. The informal defense of free markets is based on three central arguments: The formal defence of free markets is that if all markets were perfectly competitive, then prices would equal marginal. Automatic coordination of the actions of decentralized decision makers (speed and flexibility to market changes) Pursuit of profits provides a stimulus for innovation and economic growth. A situation in which the free market, in the absence of government intervention, fails to achieve allocative efficiency is called market failure. An economic outcome is allocatively efficient when marginal social costs and marginal social benefit are equal. The four main market failures that justify some government intervention are: Market power: firms with power will charge a price higher than marginal cost. Externalities: social and private marginal costs are not equal. Negative externality = too much output, positive externality = too little input.