Market Failure
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| Market Failure | Market fails to create a perfect outcome making it economically inefficient. Positive Deadweight Loss at free market level of trade. Free market outcome is inefficient.
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| What is the “market” failing to do? | Market is failing to produce and consume the quantity of the good which maxims total social surplus
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| What are the four major sources of market failure that we identified in class? | Profit maximization by a firm with market power (monopoly), market provision of public goods/common property, market provision of goods which generate externalities, and lack of information on the part of market participants
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| Monopoly | Monopoly is the market structure where there is a single seller of a unique good with no close substitutes
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| Market Power | Market power is a films ability to charge more than the competitive market price for a good/service.
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| Why can some firms raise their prices without fear, but other firms have to charge the market equilibrium price? | Those who raise prices have market power and can raise the price without losing customers due to their differing product. Those who charge equilibrium price are price rakers and need to follow the price for customers
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| Public Good | Public good is a good that is non rival and non-excludable.
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| Private Good | A good that is rival and excludable
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| In what way is a good either rival or non-rival in consumption? | Rival would mean that consumption by one person diminishes the amount of the goof available for others to consume. Non rival is when consumption by one person does not diminish the amount of the good accessible for others to consume.
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| Example of rival vs nonrival | A pizza is rival because when you eat it, the slice isn’t available for someone else. A firework show is non rival because tons of people can watch it.
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| In what way is a good either excludable or non-excludable? | Excludable is a good that is easy for a provider to stop consumption by those who do not pay. Non excludable is where it’s hard to prevent consumption by those who don’t pay.
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| Example of excludable vs nonexcluable | A pizza would be excludable because you can refuse the pizza to someone who doesn’t pay. A firework show would be non-excludable because you cant prevent someone else from enjoying the display.
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| Why can’t a private entrepreneur make a profit from selling a highly desired public good like flood control? | Can’t find a way to make the public goods excludable.
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| Explain the impact of Free-riders. | They consume goods but don’t pay. They would abuse a public good in a free market because they wouldn’t pay, but would consume the good.
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| Can a business profitably produce tornado warnings or lighthouses? | No because they are public goods and non excludable
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| Common Good/Common Resource | Hybrid good that is rival and non-excludable.
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| Characteristics of Common Good/Common Resource | Shares a characteristic with each both a private and public good
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| Examples of Common Good/Common Resource | Fish in the ocean because if a fisherman catches a fish, its one less fish for another, but there’s no way to keep fisherman out of ocean making the fish rival and nonexcludable.
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| Can private firms protect a common resource? Why? | No. Common resources are non-excludable so private firms couldn’t suddenly make them excludable.
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| Tragedy of the Commons | Economic problem where every individual tries to get the greatest benefit from a source. As the demand surpasses the supply, those consuming take from others to benefit and cause harm
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| What causes Tragedy of the Commons? | Market failure bc the free markets don’t supply enough
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| Why do we have to turn to government to solve the Tragedy of the Commons? | The gov will reduce the deadweight loss
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| Externality | Situations where third parties to a market transaction are affected by the activities of others
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| Negative Externality | External cost. Burden borne by someone other than the buyer or seller of a good.
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| Example of negative exernality | Pollution
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| Positive Externality | External benefit. Gain realized by someone other than the buyer or seller of a good.
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| Example of positive externality | Vaccinations
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| What are the market solutions to externalities? | Clearly and fully define property rights, make indiv pay compensation if they infringe upon property rights of others, allow parties to negotiate with one another regarding infringements upon property rights caused by externalities.
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| How are the market solutions to externalities related to Coasion Solution? | Same thing but Ronald Coase came up with them
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| What are the public solutions to externalities? | Command and control (direct regulation) and gov sponsored market solutions (taxes and subsidies. Cap and trade)
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