ECON 208 Chapter 16: Chapter 16
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ECON 208 Full Course Notes
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16. 2 the case for free markets: formal defense: allocative efficiency. 16. 3 market failures: failures to achieve allocative efficiency. Market power: creates allocative inefficiencies, p is greater than mc, deadweight loss- not maximizing economic surplus. Potential policies for common property resources (ivories: direct controls by the government. Canada closed atlantic cod fishery: private property rights i. e. make excludable. Asymmetric information: situation when one party to a transaction has more or better information about the transaction than the other party, asymmetric information causes market failure via, moral hazard, adverse selection. Moral hazard: changes behavior & shifts costs to others, the homeowner does not bother to shovel snow from his sidewalk as he knows if someone were to fall and break a leg, the insurance would pay for it. Adverse selection: higher risk people more likely to buy insurance and lower risk groups reject insurance, so, there should be different premiums for different groups.