chapter4 - Chapter 4 Role of government Optimal mix of...

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Chapter 4 Role of government Optimal mix of output: The most desirable combination of output attainable with existing resources, technology and social values. Market mechanism, uses market prices and sales to signal desired outputs (resource allocation) Market failure: An imperfection in market mechanism that prevents optimal outcomes Causes of Market Failure: 1.Public goods 2.Externalities 3.Market power 4.Equity 1.Public Goods Private good: A good or service whose consumption by on person excludes consumption by others Public good: A good or service whose consumption by one person does not exclude consumption by others The Free-Rider Dilemma Free rider: An individual who reaps direct benefits from someone else's purchase of a public good 2.Externalities Externalities: Costs (or benefits) of a market activity borne by a third party; the difference between social and pricavate costs (benefits) of a market activity. Social Demand = Market Demand±Externalities
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This note was uploaded on 02/14/2012 for the course ECON 20913 taught by Professor Rogerfrantz during the Fall '10 term at San Diego State.

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chapter4 - Chapter 4 Role of government Optimal mix of...

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