ECON 208 Chapter Notes - Chapter 16: Government Failure, Market Failure, Allocative Efficiency

• School: McGill University
• Department: Economics
• Course: ECON 208
• Professor: Alex Hale

Document Summary

Econ 208 chapter 16 market failures and government intervention. A decentralized market system adjusts quickly to changes. As market conditions change, prices in a market economy also change: decision makers can react continually. A market system coordinates without anybody needing to understand how the whole system works. Innovation and growth firms in free markets innovate because they get to keep the rewards similar motives give individuals an incentive to invest in human capital. Market systems have less centralized power than planned economies: this means there is probably less scope for corruption. Market failure: a situation in which the free market fails to achieve allocative efficiency four basic causes: firms with market power, externalities, common-property resources and public goods, asymmetric information. Market power firms with market power will typically reduce output below competitive levels and lead to allocative inefficiency: this is the motivation for competition policy. We must also recognize the benefits of innovation that come from imperfectly competitive firms.