chap14 - Chapter 14 Government and Market Failure...

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    Chapter 14: Government and  Market Failure
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    Externalities Negative externalities  Positive externalities
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    Negative externalities P Q D (SMB) S (PMC) SMC
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    Positive externality P Q D (PMB) S (SMC) SMB Q Q o 1
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    Solution Taxes or subsidies regulations
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    Pollution Marketable pollution permits
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    Coase theorem If property rights are well defined and  there are no transaction costs, private  bargaining can correct for the presence  of positive or negative externalities
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    Common property resources Examples: fisheries endangered species collective farms communes Solutions: establishment of property rights regulations
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    Public goods A good that is nonrival in consumption free rider problem   underproduction Solutions: subsidies or public provision
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    Imperfect information Asymmetric information – one party to a  contract has different information than  the other party
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Unformatted text preview: Adverse selection Moral hazard Adverse selection Occurs when the parties who are willing to accept a contract are of “lower quality” (from the perspective of the other party) than a random member of the population “Lemon’s problem” Examples: used cars, insurance issues, financial markets Moral hazard Occurs when one party to a contract has an incentive to alter his or her behavior to the detriment of the other party once a contract exists Solutions to asymmetric information problems Mandated information requirements Mandated warranties Copayments and deductibles Incentive-compatible contracts designed to reduce the moral hazard problem Government failure Public choice theory Logrolling Rent seeking...
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