Chapter 5

positive externalities

when a third party benefits from the actions of others ex: smells from a bakery

externalities

when an action has an effect on a non consenting third party

tragedy of the anti commons

there are too many property rights, which means that a good or resource is underused ex: russian shopping mall, apartments

how is a public good modeled?

total demand is the vertical sum of individual demand

public solutions to the lemon problem

1. licensing 2. regulation 3. inspection

Public goods

1. non rivalrous 2. non excludable ex: national defense

solutions to negative externalities

1. pigovian taxes 2. cap and trade

solutions to the tragedy of the commons

1. privatization 2. regulate its use 3. ITQs

private solutions to lemon problem

1. reputation 2. warranties 3. inspection

solutions to positive externality

1. subsidy 2. homeowners associations 3. regulations

the tragedy of the commons

a commonly owned or unowned resource is overused ex: fishery, common pasture

solutions to the tragedy of the anti commons

consolidate ownership

the lemons problem

high quality used cars are driven out of the market because sellers cannot prove their quality

adverse selection

insurance against risks attracts very high risk consumers

non excludable

it is not possible to exclude those who do not pay

non rivalrous

my consumptions doesn't reduce yours

moral hazard

once insured people may take greater risks

income inequality

technically not a market failure -not the same as poverty

Market Failure

when markets do not reach an efficient outcome

information problems

when one party to a transaction has more information than the other and this prevents some exchanges from occuring

negative externalities

when the third party suffers a cost due to the actions of others ex: pollution