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