Micro Unit 6 Flashcards
Four types of market failures
- Public goods
- Externalities
- Monopolies
- Income Inequality
why are public goods a market failure?
because of the free rider problem: when people enjoy the benefits of something without having to pay for it.
ex. paved roads, traffic lights
Two Characteristics of public goods
nonexclusion- cannot exclude people (even if they don’t pay)
shared consumption- one persons consumption of a good doesn’t reduce its usefulness to others
Maximizing rule for public goods
produce where marginal social benefit equals marginal social cost
(where MSB=MSC)
negative externality
situations that result in costs for third party individuals in society
positive externality
situations that result in benefits for third party individuals in society
why are externalities a market failure?
the free market fails to include external costs/benefits
negative externality graph
- two cost curves because there are additional costs to society; msc is above the s=mpc line because the external costs are greater than that of the private costs of the good.
positive externality graph
two benefit curves because there are additional benefits to society; msb is above the d=mpb line because the external benefits are greater than that of the private benefits of the good.
how to solve negative externality
excise tax (per unit tax)
increases the marginal private cost to meet the marginal social cost which eliminates dead weight loss
how to solve a positive externality
per unit subsidy
increases the marginal private benefit to meet the marginal social benefit eliminating dead weight loss
coase theorem
if private parties can negotiate allocation of resources on their own they can solve the problem of externalities without government intervention
where are the following points on a monopoly graph:
- unregulated
- fair return
- socially optimal
unregulated: normal (where mr=mc is quantity, and price is that point up to the demand curve)
fair return: where ATC crosses demand
socially optimal: where supply equals demand (where d=mc)
antitrust laws
laws designed to prevent monopolies and promote competition
transfer payments
when the government takes money from one group and transfers it to another group in an attempt to get closer to perfect equality
