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Market Failures: Public Goods and Externalities


Supply-side market failures occur because it is impossible in certain cases for sellers to charge consumers what they are willing to pay for a product


When a supply-side market failure occurs, the costs are greater than the benefits for the last unit(s) of output produced


Along a demand curve, product price and consumer surplus are inversely related


Along a supply curve, product price and producer surplus are inversely related


Allocative effieciency occurs where (for the last unit) maximum willingess to pay exceeds minimum acceptable price by the greatest amount


Allocative efficiency occurs where the collective sum of consumer and producer surplus is at a maximum


That government that has the smallest budget is the most efficient in the economic sense


A demand curve for a public good is determined by summing horizontally the individual demand curves for the public good


The optimal quantity of a public good occurs where the marginal benefit of the citizen who has the highest preference for the good just equals the good's marginal cost


Cost-benefit analysis is frequently difficult to apply because it difficult to quantify the full benefits of a public good or service


Society's optimal amount of pollution abatement is where society's marginal benefit of abatement is zero


An improvement in the technology of pollution control is likely to increase society's optimal amount of pollution abatement


Society's marginal cost of pollution abatement curve slope upward because of the law of diminishing marginal utility


The principle that private negotiation can resolve potential externalitites without resort to government intervention is known as the coase theorem

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