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Economics 202 Chapter 4 - Economics 202 Chapter 4 Market...

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Economics 202, Chapter 4 Market failure occurs when an imperfection in the market mechanism prevents optimal outcomes. The four specific sources of market failure are: o Public goods o Externalities o Market power o Equity A private good is a good or service whose consumption by one person excludes consumption by others. ex. pizza, cars. A public good is a good or service whose consumption by one person does not exclude consumption by others. ex. fireworks, national defense, traffic lights, light houses A free rider is an individual who reaps direct benefits from someone else’s purchase (consumption) of a public good. The market tends to under produce public goods and overproduce private goods. Externalities are the costs (or benefits) of a market activity borne by a third party. Social demand equals market demand plus externalities — the externality is subtracted if it is an external cost.
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