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Unformatted text preview: Matthew McCoy ECON201 Week 3 Chapter 5 Assignment June 25, 2011 Professor John Volpe 1. Explain the two causes of market failures. Given their definitions, could a market be affected by both types of market failures simultaneously? Demand-side market failures are underallocations of resources that occur when private demand curves understate consumers full willingness to pay for a good or service (McConnell, Brue, & Flynn, 2011, pp. G-5). Demand-side market failures arise because it is impossible in certain cases to charge consumers what they are willing to pay for a product (McConnell, Brue, & Flynn, 2011, p. 93). For instance, some airports have air shows to show off new planes or military planes. But, because this can be viewed from afar, it is impossible to tell how many people are enjoying the air show without having had to pay the admission to view the air show. Smaller, private airports would therefore be unwilling to have air shows because it wouldnt be possible to earn enough revenue to cover the costs of having the air show. Supply-side market failures are overallocations of resources that occur when private supply curves understate the full cost of producing a good or service (McConnell, Brue, & Flynn, 2011, pp. G-27). Supply-side market failures arise in situations in which a firm does not have to pay the full cost of producing its output (McConnell, Brue, & Flynn, 2011, p. 93). A market pay the full cost of producing its output (McConnell, Brue, & Flynn, 2011, p....
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