Week 13: Market Failures

a public good is any good or service that is ______

nonrivalrous and nonexcludable

nonrival goods

one person's consumption of this good does not affect another person's consumption of it

when a ______ externality exists, the socially optimal level of output will be greater than the resulting from a private market

positive

when a _____ externality exists, the socially optimal level of output will be greater than that resulting from a ______ market

positive: private

The _____ marginal cost is the cost to the producer of an additional unit of a good or service

private

_______ supply is the supply of a good or service that considers only the private coast of its production

private

social supply is the supply of good or service that reflects both the ______ and _________ costs of its production

private and external

private markets fail to provide the optimal amount of some goods, such as public firework displays, because:

private companies will have difficulty getting anybody to pay for them

______ rights involve the exclusive right to determine how a resource is used

property

any good or service that is nonrivalrous and nonexcludable is a ______ good

public

a negative externality

refers to the cost imposed on a third party

According to the Coase Theorem, if a property right is well defined and transaction costs are low,

resources will gravitate to their highest-valued use

a bicycle

rivalrous

a mobile phone

rivalrous

a washing machine

rivalrous

the demand for a good or service that reflects both the private and external benefits of its consumption is called

social demand

home inprovements

the market level of output is likely to be LESS than the efficient level of output

protective gear used in sports

the market level of output is likely to be LESS than the efficient level of output

public education

the market level of output is likely to be LESS than the efficient level of output

recycling

the market level of output is likely to be LESS than the efficient level of output

coal-fired electrical plants

the market level of output is likely to be MORE than the efficient level of output

noisy parties

the market level of output is likely to be MORE than the efficient level of output

producing electricity with coal

the market level of output is likely to be MORE than the efficient level of output

rifle range

the market level of output is likely to be MORE than the efficient level of output

Sometimes private markets can successfully provide public goods

true

the market produces the right goods in the correct amounts, using the fewest resources possible when

-there is allocative efficiency -there is productive efficiency

at the optimal level of pollution to be cleaned up,

-welfare gains from pollution prevention are maximized -the marginal benefit of preventing pollution equals the marginal cost of preventing pollution

optimal level occurs where

MB = MC

externality

The benefit enjoyed by or cost imposed on a third party not directly involved in the production or consumption of a good or service.

social marginal cost

The cost to society of producing an additional unit of a good or service; the sum of private marginal cost and external marginal cost.

public good

any good or service that is both nonrival and nonexcludable

private good

any good or service that is rival and excludable

marginal cost

are additional costs associated with increased production

pollution is an example of an economic

bad

nonexcludable goods

consumers cannot be prevented from consuming these goods

ceteris paribus, what do you expect to happen to the equilibrium quantity of pollution prevented if the marginal benefit of pollution prevention decreases?

equilibrium quantity decreases (MB shifts to the left)

if some people can be prevented or excluded from consuming a good or service, then that good or service is called:

excludable

driving an electric vehicle

external marginal benefit

public education

external marginal benefit

recycling

external marginal benefit

producing electricity with coal

external marginal cost

rifle range

external marginal cost

_______ occur when property rights are not clearly defined

externalities

when ______ exist, the outcome observed may not be the efficient outcome

externalities

In markets characterized by _______ may result in inefficient outcomes

externality

a negative ______ is the uncompensated cost of an activity that is imposed on a third party

externality

the benefit enjoyed by or cost imposed on a third party that is not directly involved in the production or consumption of a good or service is a(n) _______

externality

excludable goods

firms use prices to determine who can consume this type of good

one of the justifications for _______ intervention in markets is the potential to improve on the market outcome in markets characterized by externalities

government

from an economic perspective, pollution

has both costs and benefits

rival goods

if I consume this good, another person cannot consume it at the same time

transaction costs

involve the costs, in terms of time, energy, and resources, associated with searching out, negotiating, and completing a transaction

excludable

is a characteristic of some goods or services whereby people can be prevented, or excluded, from consuming a good or service. EX: firms can prevent people from consuming their products unless individuals pay for the right to do so. sometimes this is refered to as excludable in consumption

when a ________ externality exists, the socially optimal level of output will be less than the resulting from a private market

negative

when people cannot be prevented or excluded from consuming a good or service, then that good or service is called

nonexcludable

a fireworks show

nonrivalrous

an open-air music concert

nonrivalrous

the national army

nonrivalrous

private companies often find it difficult to earn a profit by providing a good that is nonexcludable due to:

-consumers who consume the good without paying for it -the free-rider problem

when the marginal benefit of pollution prevention ________, the equilibrium quantity of pollution prevention ________-

-decreases; decreases -increases; increases

when the marginal cost of pollution prevention ______, the equilibrium quantity of pollution prevention ________

-increase; increases -decreases; decreases (MC and quantity move in the same direction)

which of the following would you expect to increase the optimal level of pollution prevention?

-marginal cost of pollution decreases -marginal benefit of pollution prevention increases -marginal cost of pollution shifts to the left

a fireworks display at the park

-nonrivalrous -nonexcludable -public good

an empty public highway late at night

-nonrivalrous -nonexcludable -public good

a private company cannot provide _______ goods, because it does not have the ability to force people to pay for a good or service by collecting _______

-public goods -taxes

a congested toll road during the day

-rivalrous -excludable -private good

a pair of jeans

-rivalrous -excludable -private good

apples on a tree in a private orachard

-rivalrous -excludable -private good

fruits sold at a grocery store

-rivalrous -excludable -private good

at optimal level of pollution to be cleaned up,

-the marginal benefit of preventing pollution equals the marginal cost of preventing pollution -welfare gains from pollution prevention are maximized

private market

A market in which the demand and supply curves represent the benefits and costs to only the consumers and producers in the market.

the uncompensated cost of an activity that is imposed on a third party is called

a negative externality

The benefit enjoyed by a third party that is not directly involved in the production or consumption of a good or service is called:

a positive externality

the benefit enjoyed by a third party that is not directly involved in the production or consumption of a good or service is called:

a positive externality

the unpaid benefit of an activity that is enjoyed by a third party is called

a positive externality

when there is ______ and ______ efficiency, the market produces the right goods in the correct amounts, using the fewest resources possible

allocative; productive

something we would rather have less of is called

an economic bad

nonexcludable

is a characteristic of some goods or services whereby people cannot easily be prevented from consuming a good or service, even if they do not pay for it EX: a fireworks display is nonexcludable, because anyone can see the shoe once the rockets are launched. sometimes this is referred to as nonexcludable in consumption

economic bad

is something we prefer to have less of

external marginal benefit

the benefit of an additional unit of a good or service that is enjoyed by people other than the direct consumer of the good or service

private marginal benefit

the benefit to the consumer of an additional unit of a good or service

nonrival

the characteristic of some goods and services whereby the consumption of the good or service by one person does NOT diminish the amount available to someone else. sometimes referred to as nonrival in consumption

rival

the characteristic of some goods and services whereby the consumption of the good or service by one person reduces the quantity available for consumption by others. sometimes referred to as rival in consumption

external marginal cost

the cost of an additional unit of a good or service that is imposed on people other than the producer

private marginal cost

the cost to the producer of an additional unit of a good or service

private demand

the demand for a good or service that considers only the private benefits of its consumption

social marginal benefit

the full benefit to society of consuming an additional unit of a good or service; the sum of private marginal benefit and external marginal benefit

socially optimal production/consumption

the level of production and consumption of a good or service such that the marginal social benefit is equal to the marginal social cost

in general, the optimal level of pollution to either prevent or to clean up occurs where

the marginal benefit of preventing pollution equals the marginal cost of preventing pollution

a market failure occurs when

the market does not produce an output level that maximizes total surplus

driving an electric vehicle

the market level of output is likely to be LESS than the efficient level of output