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MARKET FAILURES

MARKET FAILURES

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MARKET FAILURES

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  1. MARKET FAILURES Markets WILL achieve EFFICIENCY, but they won’t achieve EQUITY! What else won’t they do?

  2. FOCUS: Market FailuresOBJ.: • 1. ID and define. • 2. Cite illustrative examples. • 3. Use specialized vocabulary.

  3. MARKET FAILURE • Occurs when • the outcome of the FREE MARKET • the SOCIALLY OPTIMAL outcome DIFFER

  4. EPISODE #31: Kinds of Market Failures (3:12) • 1. Externalities (+ and -) • 2. Public Goods • 3. Adverse Selection • 4. Moral Hazard • Click here to access tutorial #31.

  5. Paul Solman: MORAL HAZARD • MORAL HAZARD: if somebody “cleans up” the “mess” you make when you take too much risk, then (because you get rewarded instead of punished) you may choose too take more risk and make more and bigger messes in the future! • Click HERE to access video.

  6. EXTERNALITIES • People sometimes make PRIVATE decisions that have unintended impacts on others. • These are called EXTERNAL EFFECTS or EXTERNALITIES. • They occur when one person or group does something that affects other people without the usual COSTS or PAYMENTS. • A 3rd party NOT involved in the transaction • Pays a COST (NEGATIVE EXTERNALITY) without enjoying a benefit • Enjoys a BENEFIT (POSITIVE EXTERNALITY) without paying a cost.

  7. Episode #32: Externalities(7:38) • 1. NEGATIVE EXTERNALITIES: 3rd party is hurt • 2. POSITIVE EXTERNALITIES: 3rd party benefits • Click HERE to access Tutorial #32.

  8. NEGATIVE EXTERNALITIES • 1. PRIVATE cost + EXTERNAL cost SOCIAL cost • 2. GOVERNMENT’S ROLE: INTERNALIZE COSTS • Gov’t “hands on” the economy! • Regulation • Taxes • Fines • Fees

  9. POSITIVE EXTERNALITIES • 1. PRIVATE benefit + EXTERNAL benefit SOCIAL benefit • 2.GOVERNMENT’S ROLE: INTERNALIZE BENEFITS • Tax credits • Tax deductions • Subsidies • Grants • Low interest loans

  10. - EXTERNALITIES + • TOOOOOOO much • Produced at a level higher than that which is SOCIALLY OPTIMAL • Because the “baddies” creating them don’t have to pay a price • TOOOOOOOOO little • Produced at a level lower than that which is SOCIALLY OPTIMAL • Because people who don’t pay for them use them NEGATIVE EXTERNALITIES POSITIVE EXTERNALITIES

  11. Episode #33: Public Goods (3:37) • 1. PRIVATE GOODS • a. excludable • b. rivalrous • 2. PUBLIC GOODS • a. NONexcludable • b. NONrivalrous • ...The “FREE RIDER” Problem • 1.) FIREWORKS • 2.) LIGHTHOUSES • Click HERE to access Tutorial #33.

  12. D A B C