CHAPTER 7CONSUMERS, PRODUCERS, AND THE EFFICIENCY OF MARKETS157sellers sometimes affect people who are not participants in the market at all. Pol-lution is the classic example of a market outcome that affects people not in themarket. Such side effects, called externalities,cause welfare in a market to dependon more than just the value to the buyers and the cost to the sellers. Because buy-ers and sellers do not take these side effects into account when deciding how muchto consume and produce, the equilibrium in a market can be inefficient from thestandpoint of society as a whole.Market power and externalities are examples of a general phenomenon calledmarket failure—the inability of some unregulated markets to allocate resources effi-ciently. When markets fail, public policy can potentially remedy the problem andincrease economic efficiency. Microeconomists devote much effort to studyingwhen market failure is likely and what sorts of policies are best at correcting mar-ket failures. As you continue your study of economics, you will see that the tools
This is the end of the preview.
access the rest of the document.