Principles of Economics- Mankiw (5th) 151

Principles of Economics- Mankiw (5th) 151 - CHAPTER 7...

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CHAPTER 7 CONSUMERS, PRODUCERS, AND THE EFFICIENCY OF MARKETS 157 sellers 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 the market. Such side effects, called externalities, cause welfare in a market to depend on 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 much to consume and produce, the equilibrium in a market can be inefficient from the standpoint of society as a whole. Market power and externalities are examples of a general phenomenon called market failure —the inability of some unregulated markets to allocate resources effi- ciently. When markets fail, public policy can potentially remedy the problem and increase economic efficiency. Microeconomists devote much effort to studying when 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
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This note was uploaded on 07/30/2010 for the course ECON 120 taught by Professor Abijian during the Spring '10 term at Mesa CC.

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