Lecture 30 - Announcements HW for ch 14 and 16 due Today HW...

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Announcements HW for ch. 14 and 16 due Today. HW for ch. 17 due Thursday. MT3 is one week from Wednesday and will cover chs. 11-18. Practice problems are posted on Scholar. These notes are for this time and most of next.
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THE SOURCES OF MARKET FAILURE market failure Occurs when resources are misallocated, or allocated inefficiently. The result is waste or lost value. There are four important sources of market failure: (1) imperfect market structure, or noncompetitive behavior, (2) the existence of public goods, (3) the presence of external costs and benefits, and (4) imperfect information.
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Externalities The three most often heard critiques of the market economy are: 1.The lack of adequate competition in some markets (monopolies, etc. which has already been covered. 2.The distribution of income generated by market economies (we’ll talk about this next) 3.Something called externalities . Externalities have gained a lot more attention since the rise of environmental studies and the environmental movement.
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Externalities externality A cost or benefit resulting from some activity or transaction that is imposed or bestowed on parties outside the activity or transaction. Sometimes called spillovers, third-party effects, or neighborhood effects.
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Externalities A.C. Pigou was the father of modern welfare economics. Pigou wrote in the early 20 th century, in a time where the market system reigned supreme. Economists considered the markets at that time to be both efficient (in the P=MC sense) and equitable. Pigou asked, “What would happen if there was a divergence between the private cost a firm incurs and the full social cost that society incurs from the production of the good?” This may lead to “inefficiencies” in the
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Externalities Example: Say you decide to have a party in your apartment. You spend $100 on “beverages” and $50 on snacks. You also take the night off of working at Wendy’s and lose out on earning $60. Your explicit costs are $150, your implicit (opportunity) costs are $60. Your total PRIVATE economic costs are $210 . Now suppose your neighbor has an exam the next day. Your party keeps her up all night and she fails her exam. Say in order to make her feel OK about failing the exam, you would have to pay her $100 . In this case the total cost to SOCIETY (assuming she is your only neighbor) is then $210+ $100=$310 .
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Externalities In planning the party, you take only your private costs into account. But, the noise from your party is an externality that led to your neighbor failing her exam. Basically, the party imposed a cost on someone who was not involved in the party in any way. This is an external cost or “externality”.
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Externalities Not all externalities are negative. There are also things called positive externalities, but they are still market failures. Examples: Flu shots: private decision to immunize against the flu also prevents those you come in contact with from getting the flu.
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