ECO100Y5 Chapter Notes - Chapter 10,12,16: Free Rider Problem, Pigovian Tax, Production Quota
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ECO100Y5 Full Course Notes
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Information asymmetries result in market failure because prices will deviate from ef cient levels. Common examples of seller advantage are the principal agent problem and the lemons and plums problem. Examples of buyer advantage are adverse selection and moral hazard. There may be a role for government intervention. Market failure occurs because of the free rider problem. Once optimal consumption is determined by balancing costs and bene ts there may be a role for government intervention to allocate the costs of providing these goods. (fig. Externalities arise when private agents ignore social costs and bene ts. Market failure occurs because quantities deviate from optimal levels. Solutions to the externality problem which include quotas, taxes, mergers and the maintenance of property rights suggest a role for government intervention. (fig. Common goods are rival and non-excludable. (table 16-1) A rm operates in a perfectly competitive market and receives a price for its output.
