Chapter 4: Market Failure

Nonexcludable

when some people cannot be prevented, or excluded, from consuming a good or service

Benefits of taxing a product with a negative externality include

*a reduction in the quantity traded in the market *additional tax revenues that can be used to help clean up the damage caused by the externality itself *a reduction in the damage to people outside the market

What are the benefits of taxing a product with a negative externality?

-Additional tax revenues that can be used to help clean up the damage caused by the externality itself -a reduction in the quantity traded in the market -a reduction in the damage to people outside the market

Rivalry

A private good is characterized by rivalry. Rivalry in consumption means that if I consume it, you cannot.

Why do private markets fail to provide the optimal amount of some goods, such as firework displays?

Because private companies will have difficulty getting anybody to pay for them.

External marginal benefit

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

External marginal benefit

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

Private good

any service that is excludable and rivalrous

Public good

any service that is nonexcludable and nonrivalrous

Such efforts as polution controls, taxes, regulation, the enforcement of property rights, and cleanliness standards all can help minimize ___ costs and move toward efficient outcome.

external

Governments can provide public goods, because they have the ability to

force people to pay for a goo or service by collecting taxes

Social market supply curves are

higher

Private market supply curves are

lower

Externality Markets

may result in inefficient outcomes

What happens when externalities exist?

outside intervention may be able to improve the market outcome, increasing efficiency and economic surplus

Markets characterized by either ___ or ___ externalities may result in an inefficient outcome

positive, negative

Social demand is the demand for a good or service that reflects both the ___ and ___ benefits of its consumption.

private, external

One potential role of government is to

provide goods that otherwise would be under provided or not provided at all

Sometimes private markets can successfully provide

public goods

When there are positive externalities, governments intervene in the marketplace to stimulate demand toward the socially efficient level through:...

tax credits and subsidies

Private companies cannot provide public goods, because it doesn't have the ability to force people to pay for a goo or service by collecting

taxes

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.

Private marginal benefift

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

Social marginal cost

the cost to society of producing an additional unit of a good or service

Private marginal cost

the cost to the producer of producing 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.

When there is an external marginal cost

the market will produce too much output

When externalities exists

the outcome observed may not be the efficient outcome

Private supply

the supply of a good or service that considers only the private costs of its production

Social supply

the supply of a good or service that reflects both the external and internal (private) costs of the production

Private supply

the supply of a good or service that reflects only the private cost of its production

Negative externality

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

Positive externality

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

Potential role of the government

to provide PUBLIC goods (goods which are nonrival and nonexcludable in nature) that otherwise would be underprovided or not provided at all.

Nonrivalry

If one person consumes the good or service, it doesn't diminish the amount available to someone else.

A good can be a public good and not be provided by the government

True

Not all goods provided by the government are public goods

True

When there is ___ and ___ efficiency, the market produces the right goods in the correct amounts, using the fewest resources possible. It is also the interaction results between buyers and sellers

allocative, productive

Excludable

characteristic of some goods or services whereby people can be prevented, or excluded, from consuming a good or service. Example, firms can prevent people from consuming their products unless individuals pay for the right to do so. Sometimes this is referred to as excludable in consumption. Consumers are typically charged for it.

Nonrivalrous

characteristic of some goods or services whereby the consumption of a good or service by one person does not diminish the amount available to someone else. Sometimes this is referred o as nonrivalrous in consumption

Examples of goods that generate negative externalities that are taxed by the government

cigarettes, alcohol, gasoline