Unit 6 - Market failure and the role of the government Flashcards
The invisible hand
Self-interested behavior of both the business and the suppliers of resources results in the greatest amount of economic efficiency possible.
The market system guides resources into the production of the goods and services most desired by society.
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Market failure
Market failure: occurs when the competitive market system produces the “wrong” amounts of certain goods or services, or fails to provide any at all.
OR
arises when demand and supply do not accurately reflect all the benefits and all the costs of production
Demand-side failures: Underallocations of resources that occur because there are situations where it is impossible to charge all consumers, or any consumers, the price that they are willing to pay. For example: a public fireworks display. People don’t have to pay to enjoy the display. Private firms would be unwilling to produce outdoor displays as it will be impossible to raise enough revenue to cover production costs. Firm can’t prevent people from watching the fireworks if they didn’t pay.
Supply-side failures:Occurs when a firm does not pay the full cost of producing its output. For example, a coal-burning power plant: The firm running the plant pays for the land, labor, capital, and entrepreneurship that it uses to generate electricity, but it does not pay for the smoke it releases into the atmosphere and the damage that it causes to the atmosphere.
Externalities
A cost or benefit accruing to a third party external to the transaction.
Positive externalities : situation that results in a benefit for a different person than the decision maker. The benefits spill over to other people or society
Negative externalities : situation that results in a cost for a different person than the decision maker. The benefits spill over to other people or society
Correcting externalities
Income inequality
The unequal distribution of an economy´s total income among households or families.
Lorenz curve and gini ratio
The diagonal line that disects the graph would illustrate perfect income equality, meaning all groups would have an equal distribution of income. Graphing the results of the U.S. income inequality gives us the curved line showing the unequal distribution. The Gini ratio is a numerical measurement of the overall dispersion of income. Lower ratios reflect less inequality while higher ratios indicate more inequality.
The bigger the banana, the bigger the income inequality.
Private and public goods
Private goods are produced through the market because they have rivalry (one’s use of a good makes it unavailable for others) and come in units small enough to be afforded by individual buyers. Private goods are subject to excludability, the idea that those unable and unwilling to pay do not have access to the benefits of the product.
Public goods are not produced through the market because they possess the characteristics of nonrivalry and nonexcludability. Everyone can simultaneously consume, even if they do not pay.
Coarse theorem
