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Market Failures

Market Failures. Chapter 7 Sections 2 and 3 Economic Solutions to Global Warming. Market failures: externalities. Market prices are supposed to reflect the benefits and costs received by producers and consumers involved in an exchange.

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Market Failures

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  1. Market Failures Chapter 7 Sections 2 and 3 Economic Solutions to Global Warming

  2. Market failures: externalities • Market prices are supposed to reflect the benefits and costs received by producers and consumers involved in an exchange. • A market failure occurs when the market prices fail to reflect all the costs and benefits involved. • Market failures are called externalities • Sometimes externalities are called “third party” costs or benefits

  3. Negative externalities • Negative externalities are the costs paid by society for a private exchange. • For example, a steel plant may produce toxic emissions while producing steel. • The air pollution caused by the factory may lead to the increases in lung cancer and other respiratory illnesses. • The medical and hospital costs associated with the pollution is not a private cost to the steel manufacturer, but is born by the third parties who become ill.

  4. Correcting for Negative Externalities • The government may step in to correct the negative externalities by establishing higher air quality standards. • It may also tax or fine the steel company. This tax increases the costs of producing steel and lowers the supply of steel. • Finally the government may want to give incentives (subsidies or tax breaks) to companies that create steel with less pollution.

  5. Taxing Negative Externalities

  6. Positive externalities • There may be positive third party benefits, as well.(e.g. inoculations benefit public health) • A positive externality means that a good is being under produced, therefore the government may want to finance this good (e.g. public education) • The government may also increase the incentives by giving subsidies or tax breaks to an industry which creates positive third party benefits (e.g. alternative energy with non-renewable resources)

  7. Subsidizing Positive Externalities

  8. Economic Solutions to Global Warming • Raise the price of carbon based fossil fuels such as oil, coal, and natural gas • Use carbon tax to compensate for the negative spill over costs associated with carbon based fuels. • Carbon tax can be revenue neutral, or revenue from tax can subsidize renewable, clean energy • Lower the price of renewable energy such as wind, solar, and hydro electric power • Improve the technology of renewables by making solar panels more efficient or improving battery technology. • Subsidize companies and consumers who use renewables, making their price more competitive with fossil fuels.

  9. Impact of Carbon Tax on fossil fuel supply and demand for renewables

  10. Role of Government in a Market Economy • Provide a legal system enforce laws and protect private property rights • Provide Public goods that individuals or private businesses wouldn’t provide • Correct market failures such as external costs and external benefits • Maintain competition by regulating business • Redistribute income by taxing those with larger incomes and helping those in need • Stabilize the economy by reducing unemployment and inflation, while promoting economic growth

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