markets will achieve efficiency, but they won’t achieve equity! what else won’t they do?
TRANSCRIPT
MARKET FAILURESMarkets WILL achieve EFFICIENCY, but they
won’t achieve EQUITY! What else won’t they do?
1. ID and define.2. Cite illustrative examples.
3. Use specialized vocabulary.
FOCUS: Market FailuresOBJ.:
Occurs when◦the outcome of the FREE MARKET
◦the SOCIALLY OPTIMAL outcome
DIFFER
MARKET FAILURE
1. Externalities (+ and -)2. Public Goods 3. Adverse Selection4. Moral Hazard
Click here to access tutorial #31.
EPISODE #31: Kinds of Market Failures (3:12)
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.
Paul Solman: MORAL HAZARD
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.
EXTERNALITIES
1. NEGATIVE EXTERNALITIES: 3rd party is hurt
2. POSITIVE EXTERNALITIES: 3rd party benefits Click HERE to access Tutorial #32.
Episode #32: Externalities(7:38)
1. PRIVATE cost + EXTERNAL cost SOCIAL cost
2. GOVERNMENT’S ROLE: INTERNALIZE COSTS◦ Gov’t “hands on” the economy!◦ Regulation◦ Taxes◦ Fines◦ Fees
NEGATIVE EXTERNALITIES
1. PRIVATE benefit + EXTERNAL benefit SOCIAL benefit
2.GOVERNMENT’S ROLE: INTERNALIZE BENEFITS◦ Tax credits ◦ Tax deductions◦ Subsidies◦ Grants◦ Low interest loans
POSITIVE EXTERNALITIES
- EXTERNALITIES +
NEGATIVE EXTERNALITIES
POSITIVE 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
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.
Episode #33: Public Goods (3:37)
DA
B
C