Chapter 17 Missing market- the markets for labor, coal, electricity and so on tend to work efficiently. But clean air is wasted because there is no market for clean air. Market failure- a situation in which the private market economy will not tend to produce the best outcome for society. Example: pollution. Externality- the actions of one person or firm have an effect on another person or firm and the effect is not directly accounted for by the price system. Coase Theorem- if people can negotiate freely, then they should be able to achieve the efficient outcome regardless of who has the property right to the air. It doesn’t matter who gets the property rights—the only important thing is that the property rights must be defined clearly. Example: Judy and Bill pizza problem. Transaction costs- to use private negotiations to solve (for example the problem of soot in the air) it will be necessary to have hundreds of costly meetings and to hire lawyers, mediators and other middlemen because it affects so many people. These costs are called transaction costs.
This is the end of the preview.
access the rest of the document.