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.