Module 13 flashcards
what is a market?
group of buyers and sellers linked by trade in a particular product or service.
equation for social benefits
Social benefits = private benefits + external benefits (positive externalities)
equation for social costs
Social costs = private costs + external costs (negative externalities)
what is a market failure?
When prices do not reflect all social benefits and costs of a decision, we say that there has been market failure
when does a market failure occur?
- occurs when a market, left on its own, fails to make decisions in which resources are allocated efficiently.
- occurs when decisions are made where social costs exceed social benefits
- occurs when the decision maker does not correctly take into account the gains and losses imposed on others by the consequences of a decision.
what are some formal remedies for market failure?
- Economic regulation
– Bylaws (zoning and other)
– Transferable Discharge Permits (TDPs)
– Standards - uniform versus individual - Monetary incentives/deterrents
– Subsidies or taxes
– Tolls and fees. - Legal compensation
– Liability laws - strict versus negligent liability - Government provisioning
– Large scale societal benefits
– Health care, transportation, municipal services, utilities
what are some informal remedies for market failure?
– Boycotts
– Dissemination of information
what is the objective of the public sector investments?
Public sector investment is to invest in projects where the aggregate public gain is greater than the aggregate loss.
For public sector, we want to pursue projects that promote the ‘general welfare’ of society.
what is the objective of the private sector investments?
- Private sector projects are mainly pursued by private companies in the quest for profits.
- The costs and benefits for private sector are usually tangible and measureable.
true or false, public sector project evaluation is more difficult than private
true
what are the two classes of public sector projects?
1) General public services
where it is impractical to charge for such as Police, Fire protection, and municipal services such as roads and utilities.
2) Large scale of economies
where it may not make financial sense to have more than one provider such as delivery of natural gas and electricity.
what is a benefit cost analysis?
A method of project evaluation widely used in the public sector
BCA provides a general framework for assessing the gains and losses associated with alternative projects when a broad societal view is necessary to produce the greatest overall social benefit.
BCA can also be used for project evaluation in the private sector where the broader impact on society must be taken into account.
