Chapter 4: Market Failure: Public Goods and Externalities Flashcards
What two categories do market failures in competitive markets fall into?
demand side and supply side market failures
When does a demand-side market failure happen?
when demand curves do not reflect consumer’s full willingness to pay for a good or service
When do supply-side market failures occur?
when supply curves do not reflect the full cost of producing a good or service
Why do demand-side market failures arise?
because it is impossible in certain cases to charge consumers what they are willing to pay for a product
Why do supply-side market failures arise?
they arise in situations in which a firm does not have to pay the full cost of producing its ouput
What is consumer surplus?
the benefit surplus received by a consumer or consumers in a market
When does allocative efficiency occur?
at the market equilibrium quantity where three conditions exist simultaneously: MB = MC, maximum willingness to pay = minimum
What is efficiency loss (or deadweight loss)
reductions of combined consumer and producer surplus
Why may markets fail to produce any public goods?
because its demand curve may reflect more of its consumers willingness to pay
What are private goods distinguished by?
rivalry and excludability
What is rivalry?
when one person buys and consumes a product it is not available for another person to buy and consumer
What does excludability mean?
that sellers can keep people who do not pay for a product from obtaining its benefits
What characteristics do public goods have?
those opposite of private goods
What does non rivalry mean?
that one person’s consumption of a good does not preclude consumption of the good by others
What does non excludability mean?
there Is no effective way of excluding individuals from the benefit of the good once it comes into existence
What is the free-rider problem?
Once a producer has provided a public good, everyone, including non payers, can obtain the benefit
How does the government estimate the demand of a public good?
through surveys or public votes
What does the marginal-cost-marginal-benefit rule tell us?
which plan provides the maximum excess of total benefits over total costs or, in other words, the plan that provides society with the maximum net benefit
What are quasi-public goods?
goods that can be produced and delivered in such a way that exclusion would be possible
What are examples of quasi-public goods?
education, streets and highways, police and fire protection, libraries and museums, preventive medicine, and sewage disposal
Why does government often provide quasi-public goods?
to avoid the underallocation of resources that would otherwise occur
What do taxes do?
remove resources from private use
When does an externality occur?
when some of the costs or benefits of a good or service are passed onto or “spill over to” someone other than the immediate buyer or seller
What type of market failure does negative externalities cause?
supply-side market failures
What does the failure to account for all production costs cause?
a firm’s supply curves to shift to the right (or below) where they would be if firms properly accounted for all costs
What type of market failure does a positive externality cause?
demand-side market failiures
What does the failure to account for all the benefits shift?
the market demand curves to the left
Are products featuring positive externalities over or under produced?
underproduced
How can government counter negative externalities?
use direct controls and taxes: it may provide subsidies or public goods to deal with positive externalities
What are direct controls?
the direct way to reduce negative externalities from a certain activity is to pass leglislation limiting that activity (hence raising the cost of production)
What are subsidies to buyers?
government could correct the under allocation of resources by subsidizing consumers of the product
What are subsidies to producers?
payments from the government that decrease producer’s costs
What is government provisions?
providing a product for free for everyone
when does the optimal reduction of an externality occur?
when society’s marginal cost and marginal benefit of reducing that externality are equal
What is governmental failure?
economically inefficient outcomes caused by shortcomings in the public sector
