Chapter 17

Chapter 17 - Chapter 17 Market failure s situation in which...

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Chapter 17 Market failure – s situation in which the market does not provide the ideal of optimal amount of a particular good Three topics in which market failure is prominent: externalities, public goods, asymmetric information Externalities – a side effect of an action that affects the well-being of third parties (costs/benefits are external to the person who caused them) Costs and benefits of activities o Negative externality – exists when a person’s or group’s actions cause a cost (or adverse side effect) to be felt by others o Positive externality – exists when a person’s or group’s actions cause a benefit (beneficial side effect) to be felt by others Marginal Social Costs – sum of marginal private costs (MPC) and marginal external costs (MEC) o MSC = MPB + MEB Marginal Social Benefits – sum of marginal private benefits (MPB) and marginal external benefits (MEB) o MSB = MPB + MEB Socially Optimal Amount (Output) – an amount that takes into account and adjusts for all benefits (external and private) and all costs (external and private). Socially optimal amount is amount at which MSB = MSC. (referred to as efficient amount) Three categories (categorized according to whether negative or positive externalities exist) o No negative or positive externality → MEC = 0 and MEB = 0; it follows that MSC = MPC and MSB = MPB o Negative externality but no positive externality → MEC > 0 and MEB = 0; it follows that MSC > MPC and MSB = MPB o Positive externality but no negative externality → MEC = 0 and MEB > 0; it follows that MSC = MPC and MSB > MPB
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Exhibit 1 pg.407, E2 pg.408, E3 pg.409 Diagram of negative externality pg.406 Diagram of positive externality pg.407-408 Internalizing externalities o Internalized – an externality is internalized if the persons or group that generated the externality incorporate into their own private or internal cost- benefit calculations the external benefits (in the case of a positive externality) or the external costs (in the case of a negative externality) that 3 rd parties bear An externality has been internalized or adjusted for completely if, as a result, the socially optimal output emerges
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This note was uploaded on 11/03/2009 for the course ECON 2000 taught by Professor Roussell during the Fall '06 term at LSU.

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Chapter 17 - Chapter 17 Market failure s situation in which...

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