Chapter 5: Market Failures

How is productive efficiency is achieved?

When competition forces orange growers to use the best technologies and combinations of resources available.

When does the optimal reduction of an externality occur?

When society's marginal cost and marginal benefit of reducing that externality are equal.

How is allocative efficiency achieved?

When the correct quantity of oranges is produced relative to other goods and services.

Demand-side market failures happen when?

Demand curves do not reflect consumers' full willingness to pay for a good or service.

What are the two possible causes for market failure?

Demand curves that do not reflect consumers' full willingness to pay, and supply curves that do not reflect producers' full cost of production.

What are some policies for coping with the over allocation of resources?

Private bargaining, liability rules and lawsuits, direct controls, specific taxes, and markets for externality rights.

What policies could be used to correct the over allocation of resources?

Private bargaining, subsidies to producers, subsidies to consumers, and government provision.

Supply-side market failures happen when?

Supply curves do not reflect the full cost of producing a good or service.

What is consumer surplus?

The difference between the maximum price that a consumer id willing to pay for a product and the lower price actually paid.

What is producer surplus?

The difference between the minimum price that a producer is willing to accept for a product and the higher price actually received.