October 15 Lecture - External Cost and benefit Where does the idea of market failure come from Situations with dominated and infeasible options sets of

October 15 Lecture - External Cost and benefit Where does...

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October 15, 2012 External Cost and benefit Where does the idea of market failure come from? Situations with dominated and infeasible options; sets of points of possibility curve Point where to make someone better off you have to make someone worse off: Pareto optimum Social possibility frontier; set of non-dominated but feasible points that make up Pareto optimums Perfect Markets reach Pareto optimum and are well-behaved: All gains from trade are exhausted; can’t make anyone better off without making someone worse off at the possibility frontier. Market failure: Market equilibrium is not a Pareto optimum Individually rational action does not reach the social possibility frontier “smart for one is dumb for all” Possible justification for public action or intervention Not necessarily a reason for government intervention (government isn’t perfect either and could make situation worse) Classical market failures: Externalities, Commons problems, Market power (monopolies don’t lead to an optimum since often the price paid by the consumer won’t exceed the cost to producing company), Public goods/collective action, “merit goods” (notion that there are some things that are good for people even if they don’t want them) Externalities May be a benefit or cost
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  • Fall '11
  • Kleiman
  • Economics, Market failure, Externality, social possibility frontier, Ronal Coase

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