ECO3041 - Ch 9 Gov't Intervention

ECO3041 - Ch 9 Gov't Intervention - Department of...

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Department of Economics, FIU Chapter 9 Notes Prof. Dacal
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Chapter 9 Notes Chapter 9 Government Intervention I. Market Failure Optimal mix of output is the most desirable combination of output attainable with existing recourses technology and social value. Nature of market failure Market mechanism is the use of market price and sales to signal desired output. Market failure is an imperfection in the market mechanism that prevents optimal outcomes. Market failure implies that the forces of supply and demand have not led us to the best point on the production-possibility frontier curve. Market failure opens the door for government interventions. Sources of market Failure There are four specific sources of microeconomic market failure: 1. Public good, 2. Externalities, 3. Market power, and 4. Inequity. II Public Good Public good is a good or service whose consumption by one person does not exclude consumption by another. This good is non-rival and non-excludable. 2 | P a g e
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Chapter 9 Notes Private good is a good or service whose consumption by one person exclude consumption by others. This good is rival and excludable. Examples of public goods are police, military, justice, and other services (s.a. parks) that governments provide. The Free-Rider Problem Free rider is an individual who reaps the direct benefits from someone else’s purchase of a public good. A free-rider is a person who enjoys the benefits of a G & S without paying for it. Because everyone consumes the same Q of the public good and no one can be excluded from enjoying its benefits, no one has an incentive to pay for it. Everyone has an incentive to free-ride. The Problem of the Commons The problem of the commons is the absence of incentives to prevent the overuse and depletion of a commonly owned resource. If no one owns a resource, no one considers the effects of her or his use of the resource on others. Examples are Example is gracing cattle; you do not care as long as your cattle are being fed. Eventually we over feed, then no one can feed the cattle. Over fishing in the Atlantic. A common good is a good that is rival and non-excludable. There are problems with the free-rider and problem of the commons: 1. It is hard to exclude those using the product for free. 2.
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ECO3041 - Ch 9 Gov't Intervention - Department of...

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