R - Midterm Review - Identify and Explain Market failures A...

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Identify and Explain: Market failures A market failure occurs when one of the conditions of an efficient market is not met o Excludability : can prevent another person from using the good o Rivalness : when used it prevents someone else from utilizing that same good o Complete markets : there are markets for every good-> we can understand the costs of consuming a good now and assume that those same goods will have those same costs in the future (you know that in the future there will be a market for this good) o Perfect competition : every person in the market has an equal capacity to supply and demand goods (influence the market) -> everyone is a price taker not a price maker o Perfect information : all actors have equal knowledge of price an quantity of the goods o Rational actors : NCE assume that everyone will act in the same predictable manner-> to seek utility/welfare o Transaction costs : a perfect market incurs zero transaction costs o Consideration of future generations Market failures can come in many forms: o Externalities : an activity or transaction between some parties that causes an unintended loss or gain in welfare to another party, with no compensation For example: Any time environmental costs are not factored into the cost of a g/s that is not efficient -> this is a market failure and it creates an externality-> the externality is the damage done to the environment o Open-access regimes : non-excludable but rival goods For example: fisheries o Excludable goods that are non-rival For example: information Discounting (purpose of) The rate at which the present is valued over the future, as a result of uncertainty, or of productivity, or of pure time preference for the present Systematically weighting future costs and benefits as less valuable than present ones Used in making decisions on the rate of extraction of natural resources o Future value > present value = no extraction o Present value > future value = extract now Problems: o The rate you choose is important because it has a big impact on how we make decisions o We are assuming that the world will be a better place in the future
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