Macroeconomics Chapter 4
Terms in this set (36)
1. When markets don't function properly
2. economically desired goods are not produced at all
3. goods could be over produced or under produced
1. Involve a third party that is an innocent bystander, not paying for-POS or being compensated-NEG
2. Difference between MPC and MSC and MPB and MSB, difference requires government involvement by using its powers to tax, spend and regulate
Do market failures occur in competitive markets?
Two types of market failures
1. demand side market failures 2. supply side market failures
What is a demand side market failure?
When demand curves do not reflect consumers full willingness to pay for a good or service.
What is a supply side market failure?
Occurs when supply curves do not reflect the full cost of producing a good or service
What does it take for a competitive market to produce efficient outcomes?
1. the demand curve in the market must reflect consumers full willingness to pay
2. the supply curve in the market must reflect all the costs of production
Consumer surplus=price a consumer will pay-actual price of the good
Actual price a producer receives-minimum acceptable price a consumer will have to pay
All markets have downsloping or upsloping demand curves?
All markets have downsloping or upsweeping supply curves
When the level of output that society demands is produced by the firms in a market..marginal benefit=marginal cost
result from both overproduction and underproduction
Private goods (definition, example, how is it distinguished)
goods offered for sale in stores, shops, on the internet. Ex. automobiles, clothing, distinguished by rivalry and excludability
in terms of consumption, when one person buys and consumes a product it is not available for another person to buy and consume
means that sellers can keep people who do not pay for a product from obtaining its benefits
distinguished through non rivalry and non excludability
in terms of consumption, means that one persons consumption of a good does not stop consumption of the good by others. Everyone can obtain the benefit from a public good such as street lighting
No effective way of excluding individuals from the benefit of the good once it comes into existence. Once in place you cannot exclude someone from using or benefiting national defense, street lighting
Free rider problem
Non rivalry and non excludability shows this through the public good. Once a producer has provided a public good, everyone including non payers can obtain the benefit
Cost benefit analysis
deciding whether to provide a particular public good and how much of it to provide, involves a comparison of marginal benefits and marginal costs
Quasi public goods
not all goods are easily defined as rivalrous, and excludable. Falls in between these two.
Negative externalities can cause..
supply side market failures
The demand (Marginal benefit) curve for a public good is found by..
vertically adding the prices that all members of society are willing to pay for the last unit of output at various output levels
The socially optimal amount of a public good is...
amount at which marginal cost equals marginal benefit
The government uses taxes to reallocate resources from...
the production of private goods to the production of public goods and quasi public goods
Government can use ...
direct controls and taxes to counter negative externalities
Government has three options to correcting the under allocation of resources
1.subsidies to buyers 2. subsidies to producers 3.government provision
Policies for coping with the overallocation of resources, efficiency losses, caused by negative externalities
2.liability rules and lawsuits
5.markets for externality rights
Market efficiency is when..
marginal private benefit=marginal private cost
social efficiency is when..
marginal social benefit=marginal social cost
If NO firms will produce these private goods, but society depends on them then...
it falls on the government to provide them and pay for them with TAXES that everyone pays....no free riders
Rivalry, excludability goods
pizza, blue jeans
open access, non excludable
migratory birds, ocean fish
non rivalry, non excludable goods are public goods
national defense, mosquito control
non rivalry, excludable goods
cable tv, utilities
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