public finance - 1. Why externalities potential market...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
1. Why externalities potential market failure? Role of government? Externalities are a type of market failure. An externality is an activity of one entity that affects the welfares of another entity in a way that is outside the market mechanism. Externalities can cause market failure if the price mechanism does not take into account the full social costs and social benefits of production and consumption. When an externality exists, the prices in a market do not reflect the true marginal costs and/or marginal benefits associated with the goods and services traded in the market. A competitive economy will not achieve a Pareto optimum in the presence of externalities, because individuals acting in their own self interest will not have the correct incentives to maximize total surplus. Because competitive markets are inefficient when externalities are present, governments often take policy action in an attempt to correct, or internalize externalities, such as pollution taxes to correct for externalities. This means if a
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 04/26/2011 for the course BUS 562 taught by Professor Mikeorck during the Fall '08 term at Florida Southern College.

Page1 / 2

public finance - 1. Why externalities potential market...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online