TAILIEUCHUNG - Lecture Economics (9/e): Chapter 8 - David C. Colander

Chapter 8, Market failure versus government failure. After reading this chapter, you should be able to: Explain what an externality is and show how it affects the market outcome, describe three methods of dealing with externalities, define public good and explain the problem with determining the value of a public good to society, explain how informational and moral hazard problems can lead to market failure. | McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. 1 Chapter Goals Explain what an externality is and show how it affects the market outcome Define public good and explain the problem with determining the value of a public good to society Describe three methods of dealing with externalities Explain how informational and moral hazard problems can lead to market failure Explain why market failure is not necessarily a reason for government intervention 2 Market Failures Government failures are when the government intervention actually makes the situation worse A market failure is a situation in which the invisible hand pushes in such a way that individual decisions do not lead to socially desirable outcomes Externalities Public goods Imperfect information 3 Externalities Externalities are the effects of a decision on a third party that are not taken into account by the decision-maker Negative externalities occur when the effects are detrimental to others Ex. Second-hand smoke and carbon monoxide emissions Positive externalities occur when the effects are beneficial to others Ex. Education 4 Alternative Methods of Dealing with Externalities Direct regulation is when the government directly limits the amount of a good people are allowed to use Incentive policies Tax incentives are programs using a tax to create incentives for individuals to structure their activities in a way that is consistent with the desired ends Market incentives are plans requiring market participants to certify that they have reduced total consumption by a certain amount Voluntary reductions 5 Market Incentive Policies A market incentive plan is similar to direct regulation in that the amount of the good consumed is reduced A market incentive plan differs from direct regulation because individuals who reduce consumption by more than the required amount receive marketable certificates that can be sold to others Incentive policies are more efficient than .

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