mktfail

mktfail - Externalities and Public Goods Setup: Perfectly...

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Market failure slide 1 Externalities and Public Goods Setup: Perfectly competitive markets result in outputs and prices which are socially optimal in the sense of the maximizing surplus. Another way to say this is that competition results in output levels for which marginal social benefit equals marginal social cost. (MSB = MSC)
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Market failure slide 2 We saw that the presence of monopoly, for example, could justify government interference because monopolies don’t produce output levels where MSB = MSC. But even competitive markets may fail under some circumstances.
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Market failure slide 3 In what follows, we will examine the conditions under which competitive markets may fail to be optimal institutions to produce and distribute goods. This topic is known as “market failure.”
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Market failure slide 4 EXTERNALITIES An externality is a benefit or cost to third parties who are not directly involved in a transaction. Externalities are sometimes called neighborhood effects.
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Market failure slide 5 Externalities can be either beneficial or harmful, and can originate with either consumers or producers. Here are some examples: Hidden slides
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Market failure slide 6 1) Your consuming cigarettes imposes costs on others nearby in the form of bad smells and dangerous smoke. 2) Midwestern production of electricity from burning fossil fuels causes damaging acid rain in eastern Canada and northern New York. 3) Your wearing perfume or cologne makes others near you feel better off. 4) A dam built for electricity generation provides flood control to farmers and towns downstream.
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Market failure slide 7 More examples of externalities: 1) North Atlantic fishing 2) Dormitory noise pollution 3) Some kinds of education 4) Vaccinations
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slide 8 The existence of an externality creates a difference between either a) the private and social cost of production, or b) the private and social benefits from consumption. The consequence is that even competitive markets
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mktfail - Externalities and Public Goods Setup: Perfectly...

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