ECON 2301-01 Ch. 5

Market Failure

A serious situation in which the structure of incentives is such that markets will encourage individuals to undertake important activities that can cause failure to achieve the conditions implied by idealized economic efficiency

Government Failure

A serious situation in which the structure of incentives is such that the political process, including democratic & political decision-making, will encourage individuals to undertake important activities that can lead to outcomes that conflict with both the idealized economic efficiency & the efficient allocation of resources.

Key Point 2: Perfection of Efficiency

Although perfection is a noble goal; it's rarely worth achieving because additional time & resources devoted to an activity generally yield smaller benefits & costs more. Inefficiency can result in either too little or too much effort is put into an activity.

Economic Efficiency

An situation used by economist to assess the desirability of economic outcomes. This ideal Economic Efficiency occurs when these 2 conditions are needed: 1. Undertaking certain economic actions are only efficient if it produces more benefits than costs. 2. Undertaking certain economic actions are only inefficient if it produces more costs than benefits

Key Point 8: Failure.

Both Markets & governments can have problems in securing efficient resource allocations. The term Market Failure describes the situation where markets will fail to achieve the conditions implied by idealized economic efficiency. But political action may also result in inefficient outcomes, a situation known as Government Failure.

Key Point 1: Economic Efficiency

Economist use the standard of Economic Efficiency to assess the desirability of economic outcomes. Efficiency requires that 1): all actions generating more benefit than cost be undertaken & 2): that no actions generating more cost than benefit be undertaken.

Key Point 7: Solutions for market problems.

Entrepreneurs in markets have the incentive to find solutions to each market problems, & new solutions are constantly being discovered. But problems remain that can potentially be improved via government action.

Key Point 5: Externalities

Externalities reflect a lack of fully defied & enforced property rights. When External Cost is present, output can be too big - units are produced despite the cost exceeding the benefits they generate. In contrast, when External Cost is present, output can be too small - units aren't produced despite the benefits they generate exceeding the costs.

Public Goods

Goods for which rivalry among consumers is absent & the exclusion of nonpaying customers becomes difficult

Key Point 3: Protective functions

Governments can enhance economic well-being by preforming both protective functions. The protective functions involves: 1): the individual protection of individuals & their property against aggression; & 2): the provision of a legal system for enforcing contracts & settle disputes. The government's protective functions can help people obtain goods that would be hard to supply via markets.

Repeat-purchase items

Items that are often purchased by the same buyer, who use past experiences on buying these kinds of items to acquire accurate information & make wise choices

Key Point 6: Public Goods

Public Goods are goods for which 1): rivalry for consumption is absent, & 2): It's hard to exclude those who don't pay. Because of difficulties involved in starting a 1-on-1 link between payment & receipt of such goods, The market supply of public goods will often be less than the economically efficient quantity

Franchise

Rights or licenses granted to certain individuals to market a company's goods or services or using said company's brand name. The individual firms are independently owned, but must meet certain conditions to continue to use the name

Externalities

Spillover effects of certain activities that influences the well-being & needs of non consenting 3rd parties

External Benefits

Spillover effects that generates benefits & enhance the welfare of the non consenting 3rd parties.

External Cost

Spillover effects that harms the well-being of non consenting 3rd parties in certain methods

Free Riders

Those who receives the benefits of a good without paying for said good's cost. Because it's often virtually impossible to restrict the consumption of public goods to those who can pay, these kinds of goods are subject to Free Riders Issues.

Key Point 4: Economic Efficiency Problems

When markets fail to meet the conditions for the ideal economic efficiency, the problem can generally be traced to one of these 4 sources: The complete lack of Competition in the markets, the existences of externalities, certain public goods & why they pose a problem for the market; or some issues on potential information, along with some info being used as profit opportunities