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eep2010_lecture_1 - MarketFailure:Externalities...

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Market Failure: Externalities,  Monopoly, Asymmetric  Information, and Public Goods
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Three major functions of state Correcting Market failures Redistribution of income Promoting and discouraging merit goods and bads
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Measuring Economic  Efficiency How might we measure the extent to which courier  industry in India is being economically efficient? Economic efficiency generally relates to how well a  market or the economy allocates resources to satisfy  consumers. Efficiency occurs when society is using its scarce  resources to produce the highest possible amount of  goods and services that consumers most want to buy.  
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Allocative Efficiency Does the market economy deliver goods and services  to us at a price that fairly reflects the cost of supply? Does the market deliver the goods and services we  most value at a fair price? The technical condition required for allocative efficiency  is that price=marginal cost= marginal value. When this happens, total economic welfare is  maximized. 
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Consumer and Producer  Surplus
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Market Failures Market failure  can be viewed as a scenario in which  individuals' pursuit of self-interest leads to bad results  for society as a whole. Sources of Market Failure: 1. Externalities:  2. Imperfect Information.  3. Market Power. 4. Public Goods.  
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Externalities: A case Study Aluminium Industry. Can the Market Provide Adequate   Protection for the  Environment?
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Figure 1 The Market for Aluminum Quantity of Aluminum 0 Price of Aluminum Equilibrium Demand (private value) Supply (private cost) Q MARKET
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EXTERNALITIES AND  MARKET INEFFICIENCY An  externality  refers to the uncompensated impact of one  person’s actions on the well-being of a bystander.
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