Chapter 28 econ -...

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www.swcollege.com/bef/arnold/instructor/arnold6e/im30.doc CHAPTER 30 Market Failure: Externalities, Public Goods, and Asymmetric Information A market failure occurs when the market does not provide the optimal amount of a particular good, despite the rational behavior of the participants in the market . In Chapters 23 and 24 we saw one class of market failure—the structural market failure , where the structure of the market itself ensures that the optimal quantity of the good will not be produced. In this chapter, we turn to two other types of market failures: externalities and public goods . The first two sections of Chapter 30 develop the theory of externalities— negative and positive—and the ways in which external costs and/or benefits may be “controlled.” The third section analyzes some important environmental issues from an economic perspective. The fourth section introduces the student to the notion of public goods, the free rider problem , and the role of the government in providing public goods. Finally, we discuss some interesting “real-world” cases involving externalities and/or public goods in light of the theory developed in the preceding pages. CHAPTER OBJECTIVES Upon completing this chapter, your students should be able to: 1. Explain the difference between negative and positive externalities. 2. Explain how externalities can cause market failure. 3. Discuss the various ways in which externalities can be internalized. 4. Discuss the various methods of reducing or eliminating pollution. 5. Identify the characteristics of public goods. 6. Explain why markets fail to produce nonexcludable public goods. 7. Discuss the effects of asymmetric information. KEY TERMS market failure • rivalrous in consumption externality • public good negative externality • nonrivalrous in consumption positive externality • excludability marginal social costs (MSC) • nonexcludability marginal social benefits (MSB) • free rider socially optimal amount (output) • asymmetric information internalizing externalities • adverse selection 32
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33 Chapter 30 Coase theorem • moral hazard
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CHAPTER OUTLINE I.EXTERNALITIES —Sometimes, when goods are produced and consumed, that production/consumption affects people not directly involved in the market exchange. These “spillover” effects are called externalities , because the costs or benefits that occur are external to the party (-ies) that caused them. A.Costs and Benefits: Private and External 1. Negative Externalities —When a person’s or group’s actions cause harmful side effects that are felt by others, we say a negative externality has occurred. Examples of negative externalities include air, water, and noise pollution. As a consequence, the costs of the transaction to society (social costs) are not fully reflected in the costs to the purchaser(s)/producer(s) of the good or service (private costs). That is, private costs are unequal to social
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Chapter 28 econ -...

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