EC 201 Chapter Notes - Chapter 4: Avoidance Speech, Economic Surplus, Market Failure
Chapter 4: Market Failures: Public Goods and Externalities
Market failures: inability of a market to bring about the allocation of resources that best satisfy the
wants of society
Market Failures in Competitive Markets
ā Demand-side market failures happen when demand curves do not reflect consumersā full
willingness to pay for a good or service
ā EX. outdoor fireworks, people enjoy fireworks and would therefore be willing to pay to
see a fireworks display if the only way to see it was to have to pay for the right to do so.
But, since such displays are outdoors and in public, people donāt actually have to pay to
see the display because there is no way to exclude those who havenāt paid from also
enjoying the show
ā Supply-side market failures occur when supply curves do not reflect the full cost of producing a
good or service
ā EX. coal-burning power plant, the firm running the plant will have to pay for all of the
land, labor, capital, and entrepreneurship that it uses to generate electricity by burning
coal. But if the firm is not charged for the smoke that it releases into the atmosphere,it
will fail to pay another set of costs- the costs that its pollution imposes on other people
Efficiently Functioning Markets
ā Consumer Surplus
ā Consumer surplus: benefit surplus received by a consumer or consumers in a market
ā Difference between the maximum price a consumer is willing to pay for a
product and the actual price that they do pay
ā
ā Producer Surplus
ā Producer surplus: difference between the actual price a producer receives and the
minimum acceptable price that a consumer would have to pay the producer to make a
particular unit of output available
ā
ā Efficiency Revisited
ā Efficiency: maximum combined consumer and producer surplus
find more resources at oneclass.com
find more resources at oneclass.com
