ECON BC 1003x Lecture Notes - Lecture 8: Market Failure, Externality
13 Oct 2016
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Market failure: optimal mix of output is not what is ideal, market mechanism: use of market prices and sales to signal desired outputs (or resource allocations) Implies that the forces of supply and demand have not led to the best possibilities of production: microeconomic areas of market failure: Public goods a good or service whose consumption by person does not preclude consumption by others. Market failure ii: externalities: externalities are costs (or benefits) of a market activity born by a third party, not the buyer or seller. Difference between a social and private cost (or benefit) of a market activity: negative and positive externalities. Positive (benefits): market under-produces goods that yield external benefits. Gover(cid:374)(cid:373)e(cid:374)t"s role is the i(cid:374)(cid:272)rease produ(cid:272)tio(cid:374: example: public education. Negative (costs): market over-production of goods that generate external costs. Others suffer a cost from a two-party transaction. Gover(cid:374)(cid:373)e(cid:374)t"s role is to de(cid:272)rease produ(cid:272)tio(cid:374: example: pollution, social demand.
