Textbook Notes (369,127)
Canada (162,403)
Economics (326)
ECON 110 (199)
Chapter 16

Chapter 16.docx

5 Pages
95 Views

Department
Economics
Course Code
ECON 110
Professor
Ian James Cromb

This preview shows pages 1 and half of page 2. Sign up to view the full 5 pages of the document.
Description
Chapter 16 – Market Failures and Government Intervention  The operative choice is not between an unhampered free-market economy and a full centralized command economy. It is rather the choice of which mix of markets and government intervention best suits people’s hopes and dreams  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.  Informal defence of free markets is based on three central arguments o Free markets provide automatic coordination of the actions of decentralized decision makers o The pursuit of profits in free markets provides a stimulus to innovation and rising material lining standards o Free markets permit a decentralization of economic power  Market failure: describes a situation in which the free market, in the absence of government intervention, fails to achieve allocative efficiency  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 resource 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  Discrepancies between private cost and social cost occur when there are externalities. The presence of eternities, even when all markets are perfectly competitive, leads to allocative inefficient outcomes.  With positive externality, a competitive free market will produce too little of the good. With a negative externality a competitive free market will produce too much of the good.  See figure 16-1 pg. 391 for diagram  Rivalrous: a good or service is Rivalrous if, when one person consumes one unit of it, there is one less unit available for others to consume.  Excludable: a good or service is excludable if its owner can prevent others from consuming it.  Goods that are both rivalrous and excludable - private goods - pose no particular problem for public policy.  Goods that are rivalrous and non-excludable are called common-property resources. They tend to be overused by private firms and consumers.  To avoid inefficient exclusions, the government often provides for free non-rivalrous but excludable goods and services.  Because of the free-rider problem, private markets will not always provide public goods. In such situations, public good must be provided by government.  The optimal quantity of a public good is such that the marginal cost of the good equals the sum of all users’ marginal benefits of the good. o Figure 16-2 pg.396 Excludable Non-excludable Private Goods Common-Property Resources  DVDs  Fisheries Rivalrous  A seat on an airplane  Rivers and streams  An hour of legal advice  Wildlife  Clean air Non-Rivalrous Public Goods (up to capacity)  Art galleries  National defence  Roads  Public information  Bridges  Public production  Cable or satellite TV signal  Regular TV signal  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.  Summary of market failures; the following four situations result in market failures and, at least in principle, provide a rationale for government interventions. o Firms with market power will charge a price greater than marginal cost. The level of output in these cases is less than the allocative efficient level. o When there are externalities, social and private marginal costs are not equal. If there is a negative externality, output will be greater than the allocative efficient level. If there is a positive externality, output will be less than the allocative efficient level. o Common-property resources will be overused by priva
More Less
Unlock Document

Only pages 1 and half of page 2 are available for preview. Some parts have been intentionally blurred.

Unlock Document
You're Reading a Preview

Unlock to view full version

Unlock Document

Log In


OR

Join OneClass

Access over 10 million pages of study
documents for 1.3 million courses.

Sign up

Join to view


OR

By registering, I agree to the Terms and Privacy Policies
Already have an account?
Just a few more details

So we can recommend you notes for your school.

Reset Password

Please enter below the email address you registered with and we will send you a link to reset your password.

Add your courses

Get notes from the top students in your class.


Submit