14_01_lec21 - duction which is not reflected in market...

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1 1 Why Markets Fail 14.01 Principles of Microeconomics, Fall 2007 Chia-Hui Chen November 2, 2007 Lecture 21 Why Markets Fail Outline 1. Chap 16: Why Markets Fail 1 Why Markets Fail 1.1 Market Power Inefficiency arises when a producer or supplier of a factor input has market power, for example, monopoly power, that can pro±tably charge a price greater than marginal cost. 1.2 Incomplete Information For example, in the second-hand car market, sellers know more about the cars than buyers. Final allocation might be inefficient when there is incomplete information. 1.3 Externalities Consumption or production has indirect effect on other consumption or pro-
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Unformatted text preview: duction, which is not reflected in market prices. An example is air and water pollution by a factory. 1.4 Public Goods For one ±rm’s new technology, others may copy it if there is no patent law; all ±rms are thus waiting for others to invent. Examination 2 Review Examination: Chapter 6, 7, 8, 9, and 16. (Review Lectures 10–20.) Cite as: Chia-Hui Chen, course materials for 14.01 Principles of Microeconomics, Fall 2007. MIT OpenCourseWare (http://ocw.mit.edu), Massachusetts Institute of Technology. Downloaded on [DD Month YYYY]....
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