Week 13: Market Failures
a public good is any good or service that is ______
nonrivalrous and nonexcludable
nonrival goods
one person's consumption of this good does not affect another person's consumption of it
when a ______ externality exists, the socially optimal level of output will be greater than the resulting from a private market
positive
when a _____ externality exists, the socially optimal level of output will be greater than that resulting from a ______ market
positive: private
The _____ marginal cost is the cost to the producer of an additional unit of a good or service
private
_______ supply is the supply of a good or service that considers only the private coast of its production
private
social supply is the supply of good or service that reflects both the ______ and _________ costs of its production
private and external
private markets fail to provide the optimal amount of some goods, such as public firework displays, because:
private companies will have difficulty getting anybody to pay for them
______ rights involve the exclusive right to determine how a resource is used
property
any good or service that is nonrivalrous and nonexcludable is a ______ good
public
a negative externality
refers to the cost imposed on a third party
According to the Coase Theorem, if a property right is well defined and transaction costs are low,
resources will gravitate to their highest-valued use
a bicycle
rivalrous
a mobile phone
rivalrous
a washing machine
rivalrous
the demand for a good or service that reflects both the private and external benefits of its consumption is called
social demand
home inprovements
the market level of output is likely to be LESS than the efficient level of output
protective gear used in sports
the market level of output is likely to be LESS than the efficient level of output
public education
the market level of output is likely to be LESS than the efficient level of output
recycling
the market level of output is likely to be LESS than the efficient level of output
coal-fired electrical plants
the market level of output is likely to be MORE than the efficient level of output
noisy parties
the market level of output is likely to be MORE than the efficient level of output
producing electricity with coal
the market level of output is likely to be MORE than the efficient level of output
rifle range
the market level of output is likely to be MORE than the efficient level of output
Sometimes private markets can successfully provide public goods
true
the market produces the right goods in the correct amounts, using the fewest resources possible when
-there is allocative efficiency -there is productive efficiency
at the optimal level of pollution to be cleaned up,
-welfare gains from pollution prevention are maximized -the marginal benefit of preventing pollution equals the marginal cost of preventing pollution
optimal level occurs where
MB = MC
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.
social marginal cost
The cost to society of producing an additional unit of a good or service; the sum of private marginal cost and external marginal cost.
public good
any good or service that is both nonrival and nonexcludable
private good
any good or service that is rival and excludable
marginal cost
are additional costs associated with increased production
pollution is an example of an economic
bad
nonexcludable goods
consumers cannot be prevented from consuming these goods
ceteris paribus, what do you expect to happen to the equilibrium quantity of pollution prevented if the marginal benefit of pollution prevention decreases?
equilibrium quantity decreases (MB shifts to the left)
if some people can be prevented or excluded from consuming a good or service, then that good or service is called:
excludable
driving an electric vehicle
external marginal benefit
public education
external marginal benefit
recycling
external marginal benefit
producing electricity with coal
external marginal cost
rifle range
external marginal cost
_______ occur when property rights are not clearly defined
externalities
when ______ exist, the outcome observed may not be the efficient outcome
externalities
In markets characterized by _______ may result in inefficient outcomes
externality
a negative ______ is the uncompensated cost of an activity that is imposed on a third party
externality
the benefit enjoyed by or cost imposed on a third party that is not directly involved in the production or consumption of a good or service is a(n) _______
externality
excludable goods
firms use prices to determine who can consume this type of good
one of the justifications for _______ intervention in markets is the potential to improve on the market outcome in markets characterized by externalities
government
from an economic perspective, pollution
has both costs and benefits
rival goods
if I consume this good, another person cannot consume it at the same time
transaction costs
involve the costs, in terms of time, energy, and resources, associated with searching out, negotiating, and completing a transaction
excludable
is a characteristic of some goods or services whereby people can be prevented, or excluded, from consuming a good or service. EX: firms can prevent people from consuming their products unless individuals pay for the right to do so. sometimes this is refered to as excludable in consumption
when a ________ externality exists, the socially optimal level of output will be less than the resulting from a private market
negative
when people cannot be prevented or excluded from consuming a good or service, then that good or service is called
nonexcludable
a fireworks show
nonrivalrous
an open-air music concert
nonrivalrous
the national army
nonrivalrous
private companies often find it difficult to earn a profit by providing a good that is nonexcludable due to:
-consumers who consume the good without paying for it -the free-rider problem
when the marginal benefit of pollution prevention ________, the equilibrium quantity of pollution prevention ________-
-decreases; decreases -increases; increases
when the marginal cost of pollution prevention ______, the equilibrium quantity of pollution prevention ________
-increase; increases -decreases; decreases (MC and quantity move in the same direction)
which of the following would you expect to increase the optimal level of pollution prevention?
-marginal cost of pollution decreases -marginal benefit of pollution prevention increases -marginal cost of pollution shifts to the left
a fireworks display at the park
-nonrivalrous -nonexcludable -public good
an empty public highway late at night
-nonrivalrous -nonexcludable -public good
a private company cannot provide _______ goods, because it does not have the ability to force people to pay for a good or service by collecting _______
-public goods -taxes
a congested toll road during the day
-rivalrous -excludable -private good
a pair of jeans
-rivalrous -excludable -private good
apples on a tree in a private orachard
-rivalrous -excludable -private good
fruits sold at a grocery store
-rivalrous -excludable -private good
at optimal level of pollution to be cleaned up,
-the marginal benefit of preventing pollution equals the marginal cost of preventing pollution -welfare gains from pollution prevention are maximized
private market
A market in which the demand and supply curves represent the benefits and costs to only the consumers and producers in the market.
the uncompensated cost of an activity that is imposed on a third party is called
a negative externality
The benefit enjoyed by a third party that is not directly involved in the production or consumption of a good or service is called:
a positive externality
the benefit enjoyed by a third party that is not directly involved in the production or consumption of a good or service is called:
a positive externality
the unpaid benefit of an activity that is enjoyed by a third party is called
a positive externality
when there is ______ and ______ efficiency, the market produces the right goods in the correct amounts, using the fewest resources possible
allocative; productive
something we would rather have less of is called
an economic bad
nonexcludable
is a characteristic of some goods or services whereby people cannot easily be prevented from consuming a good or service, even if they do not pay for it EX: a fireworks display is nonexcludable, because anyone can see the shoe once the rockets are launched. sometimes this is referred to as nonexcludable in consumption
economic bad
is something we prefer to have less of
external marginal benefit
the benefit of an additional unit of a good or service that is enjoyed by people other than the direct consumer of the good or service
private marginal benefit
the benefit to the consumer of an additional unit of a good or service
nonrival
the characteristic of some goods and services whereby the consumption of the good or service by one person does NOT diminish the amount available to someone else. sometimes referred to as nonrival in consumption
rival
the characteristic of some goods and services whereby the consumption of the good or service by one person reduces the quantity available for consumption by others. sometimes referred to as rival in consumption
external marginal cost
the cost of an additional unit of a good or service that is imposed on people other than the producer
private marginal cost
the cost to the producer of 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; the sum of private marginal benefit and external marginal benefit
socially optimal production/consumption
the level of production and consumption of a good or service such that the marginal social benefit is equal to the marginal social cost
in general, the optimal level of pollution to either prevent or to clean up occurs where
the marginal benefit of preventing pollution equals the marginal cost of preventing pollution
a market failure occurs when
the market does not produce an output level that maximizes total surplus
driving an electric vehicle
the market level of output is likely to be LESS than the efficient level of output