AREC365 Lecture Notes - Lecture 4: Prentice Hall, Market Failure, Externality

• School: University of Alberta
• Department: Agricultural and Resource Economics
• Course: AREC365
• Professor: Terence Veeman

Document Summary

Market failure: the presence of externalities, the presence of public goods. Imperfect market structures or imperfect competition: monopoly/oligopoly (see econ 101) Imperfect information: long-run average cost declining, set long run marginal cost = price results in losses, *income distribution, technically not a market failure, but an adverse outcome of the market, government failure, rent-seeking. An externality occurs whenever the activities of one person (or economic agent) affect the welfare or production functions of other people (or economic agents) who have no control over that activity. Two key characteristics of an externality: the interdependence condition, output - ybrewery = f((xb. 1, xb2, xm); xf dirty water) production function, where b refers to brewery inputs, f refers to foundry (steel plant) externalities, in this case polluted water, and the output of the brewery is affected. Foundry inputs: this impact is not transmitted through the market price system, technical link, consumption example: utility function: uind.