Lecture Notes for Chapter 5(1)

Lecture Notes for Chapter 5(1) - Chapter 5 Market Failures:...

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Chapter 5 Market Failures: Public Goods and Externalities Market Failure in Competitive Markets What is market failure? When markets fail to reach competitive equilibrium. Two type of market failures: 1. Demand-side market failure 2. Supply-side market failure Demand-side market failure – The nature of public goods: Parks, firework shows, enjoying the beach… In all these cases consumers’ willingness to pay is not reflected in their demand for what they consume. Supply-side market failure – The nature of externalities: Pollution, congestion, noise problems…. In all these cases producers fail to pay the true cost of production. When the market fails to measure the true benefits and costs of these situations, we have market failure. Efficiency in Markets - Consumer and producer surplus Consumer surplus Consider the following comparison of actual and reservation prices:
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Producer surplus Consider the following comparison of actual and minimum acceptable prices: Now, let’s put the two together:
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Lecture Notes for Chapter 5(1) - Chapter 5 Market Failures:...

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