Econ103part10 - PART 10 Market Failures Markets may fail to...

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PART 10 Market Failures Markets may fail to generate efficient results due to Monopoly Externalities Public Goods Open Access Markets may also have informational problems— adverse selection and moral hazard
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Externalities An externality is a cost or a benefit that is not reflected in market demand or supply curves An effect external to the market Environmental pollution, congestion in cities, etc Output $ S (MC) MSC D (MB) Q’ Q*
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Pollution and Abatement Pollution imposes costs Abatement of pollution is also costly “Optimal” amount of pollution is where MC of pollution is equal to its MB Marginal benefit of pollution is the abatement cost saved Can also think of this as the MC and MB of abatement
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Pollution and Abatement Optimal quantity of pollution Pollution $ MB MC P* P’ If the affected parties cannot negotiate the market will produce P’ pollution
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Pollution and Abatement Optimal quantity of abatement MC MB Abatement $ A* If the affected parties cannot negotiate the market would produce no abatement. 0
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Externalities and Transactions Costs Externalities can be thought of a being caused by a lack of property rights or high
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Econ103part10 - PART 10 Market Failures Markets may fail to...

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