Ch. 9
The goals of macro intervention:
-To foster economic growth. -To get us on the production-possibilities curve (full employment). -To maintain a stable price level (price stability). -To increase our capacity to produce (growth).
The Nature of Market Failure:
-an imperfection in the market mechanism that prevents optimal outcomes. -forces of supply and demand have not led to the best point on the production possibilities curve. -establishes a basis for government intervention.
Micro failures
concern producing at the wrong point on the production-possibilities curve or inequitably distributing the output produced.
The goal is to ______ production and consumption activities that impose external costs on society. We can do this in one of two ways:
discourage -Alter market incentives. -bypass market incentives.
Whenever external benefits exist, the social demand ________the market demand.
exceeds
Government failure-
government intervention that fails to improve economic outcomes.
Antitrust policy-
government intervention to alter market structure or prevent abuse of market power.
emission charge
is a fee imposed on polluters, based on the quantity of pollution. increases private marginal cost and thus encourages lower output.
public good
is a good or service whose consumption by one person does not exclude consumption by others.
private good
is a good or service whose consumption by one person excludes consumption by others
Social demand =
market demand (private benefits only) + externalities (costs or benefits borne by a third party)
Market mechanism
mechanism-the use of market prices and sales to signal desired outputs (or resource allocations)
When external costs exist, firms will produce _____of the good than is socially desirable.
more
The market will _______goods that generate external _____.
overproduce, costs
Whenever external costs exist, market demand _________social demand.
overstates
Income transfers-
payments to individuals for which no current goods or services are exchanged.
Social demand includes not only _____ but also accounts for any __________:
private benefits, externalities
market demand=
private demand
Market incentives can be bypassed through direct _________.
regulation
External costs are equal to External costs =
the difference between social and private costs: social costs - private costs
Market power is the ability to alter
the market price of a good or service.
The optimal mix of output
the most desirable combination of output attainable with existing resources, technology, and social values.
The distinction between public goods and private goods is based on
the nature of the goods, not who produces them.
In trying to maximize their own satisfaction, consumers often do not consider how their consumption affects
the well-being of others.
The market will _____ goods that yield external _______
underproduce, benefits
Market power results from restricted supply due to
Copyrights Patents Control of resources Restrictive production agreements Efficiencies of large-scale production
Equity concerns the ____________ question.
FOR WHOM
There are four specific sources of microeconomic market failure:
Public goods Externalities Market power Inequity
3 policies to prevent market power
The Sherman Act (1890) The Clayton Act (1914) The Federal Trade Commission Act (1914)
free rider
an individual who reaps direct benefits from someone else's purchases (consumption) of a public good.
Externalities
are costs (or benefits) of a market activity borne by a third party.
Private costs
are the costs of an economic activity directly borne by the immediate producer or consumer (excluding externalities).
Social costs
are the full resource costs of an economic activity, including externalities.