Microeconomics - market failures, externalities, public/private goods

If the production of a product or service involves external benefits, then the government can improve efficiency in the market by

provides a subsidy to correct for an underallocation of resources.

Government can correct for positive externalities by:

providing subsidies to consumers (vouchers) or producers, government can provide more of the actual product (example- public school for more education), private bargaining

efficiency (or deadweight) losses

reductions in combined consumer and producer surplus caused by an underallocation or overallocation of resources to the production of a good or service

Market Failure

result in overproduction or underproduction of a good. Markets don't function properly and desirable goods are not produced at all, or over or underproduced which means resources are not properly allocated.

Supply-side market failures occur when:

supply curves don't reflect the full cost of producing a good or service. Causes Overproduction of product and overallocation of resources

allocative efficiency

A state of the economy in which production is in accordance with consumer preferences; in particular, every good or service is produced up to the point where the last unit provides a marginal benefit to society equal to the marginal cost of producing it MB=MC maximum willingness to pay = minimum acceptable price

Reallocation Process

Taxes individuals and businesses Takes the money and spends on production of public goods

Government provides subsidies for ____________allocation of resources or ___________allocation of output.

Underallocation of resources and Underallocation of output which allows more to produced or more to be bought by consumers.

demand-side market failures

Underallocations of resources that occur when private demand curves understate consumers' full willingness to pay for a good or service. Not possible to charge consumers for the full cost of the product

Demand-side market failures occur when:

the demand and supply curves don't reflect consumers' full willingness to pay for a good or service.

consumer surplus

the difference between the highest price a consumer is willing to pay for a good or service and the actual price the consumer pays

People enjoy outdoor holiday lighting displays and would be willing to pay to see these displays but can't be made to pay. Because those who put up lights are unable to charge others to view them, they don't put up as many lights as people would like. This is an example of a . _____________ side market failure.

Demand Side Market Failure

When producers don't produce enough of a product or service and some people enjoy benefits without paying, it results in a ____________-side market failure.

Demand Side Market Failure

Efficiently Functioning Markets

Demand curve must reflect the consumers' full willingness to pay • Supply curve must reflect all the costs of production • Benefit surpluses are maximized for consumers and producers

Producer Surplus

Difference b/w actual price producer(s) receives and the minimum acceptable price that a consumer would pay

Pollution (air, noise, other types), industrial waste, second hand smoke, CO2 or Methane emissions, traffic congestion, are examples of Positive or Negative externalities?

Negative Externality - Supply Side Market Failure

Consumer Surplus and price are Negatively (inversely) or Positively (directly) related.

Negatively related -- As price increases, consumer surplus decreases.

Vaccines, research and development, better education, Biking to work which cuts down on highway congestion, are examples of _____________ externalities.

Positive Externalities which produce spillover benefits.

Producer surplus is negatively or positively correlated with price?

Positively/ directly correlated with price. As price increases, producer surplus increases.

If a good that generates positive externalities was produced and priced to take into account these spillover benefits, then its price would ________ and the output would ___________.

Price and Output would increase

calculate producer surplus

Price paid (equilibrium price) - minimum acceptable price

market systems do not produce public goods because

Private firms cannot stop consumers who are unwilling to pay for such goods from benefiting from them

In a Cost- Benefit Analysis, the cost represents:

Resources diverted from private good production and the Private goods that will not be produced

Negative externalities cause a _________________-side market failure.

Supply Side Market Failure -- overproduction of output and therefore overallocation of resources.

A firm keeps its production costs down by dumping its hazardous waste in the nearby river. This creates a ____________-side market failure.

Supply Side because it doesn't take into account the full costs of production.

In a Cost - Benefit Analysis, the benefit represents:

The extra satisfaction from the output of more public goods

Public Good

a shared good or service for which it would be impractical to make consumers pay individually and to exclude nonpayers

cost-benefit analysis

a study that compares the costs and benefits to society of providing a public good Comparison of marginal costs of a program or project w/ marginal benefits to decide whether or not to employ resources in that program or project and to what extent

Pigovian Tax/Subsidy

a tax/subsidy intended to correct an externality problem

Externality

an economic side effect of a good or service that generates benefits or costs to someone other than the person (3rd person) deciding how much to produce or consume

positive externality

beneficial side effect that affects an uninvolved third party - also called spillover benefits.

quasi-public goods

could be provided through the market system but Because of positive externalities the government provides them • Examples are education, streets, museums

free rider problem

created by nonexcludability and nonrivalary Inability of potential providers of an economically desirable service or good to obtain payment from people who benefit due to nonexcludability.

Government can correct for negative externality by imposing:

direct controls (regulations or laws); Pigovian tax, tax on producers or products, private bargaining.

Pirated Internet file sharing for music is the result of a

free rider problem

private goods

goods that are both excludable and rival in consumption

Supply Side Market Failure

happens when a producer (firm or company) does not pay the FULL COST of producing a product or output

Augi is the hottest new pop singer, but her agent discovers that Internet sales of Augi's music have been poor due to Internet piracy. However, concerts are regularly sold out and merchandise (such as T-shirts) sells well. If Augi wants to enhance profits, economists would most likely recommend that she

keep download prices low and raise prices for concerts and merchandise

calculate consumer surplus

max price willing to pay - actual price (equilibrium price)

Toll-free roads sometimes get congested, such as during rush-hour traffic. During those times, we would say that these roads are

nonexcludable and rival

Street entertainers and public fireworks displays face the free-rider problem when they perform because of the

nonexcludablitiy characteristic

Public goods are characterized by:

nonrivalry in consumption. nonexcludability of nonpayers Once in place you can't exclude someone from benefiting.

nonrivalary

one's consumption of a good doesn't preclude consumption of the good by others. Everyone can simultaneously obtain benefit from public good like street lighting, environmental protection, national defense, or a global positioning system

When producers don't have to pay the full cost of production, they tend to _____________________ the product because of a _______________-side market failure

overproduce resulting in a supply-side market failure (too much is produced)

nonexcludability

there is no effective way of excluding individuals from the benefit of the good once it comes into existence

Producer surplus on a graph is

triangular area above supply curve and below market price

consumer surplus on a graph

triangular area below demand curve and above market price.

Positive Externalities cause a _________production of output/goods and therefore a ___________allocation of resources.

underproduction (too little is produced) and under allocation of resources.

Negative Externality

when consuming or producing a product or service SPILL OVER or cost a third party that is not the direct consumer of the item.