ECON 2305 Lecture 8 Outline of Last Lecture I. Price Elasticity of DemandOutline of Current Lecture I. Macro and Micro failures II. Economic functions of government III. Externalities Current LecturePrices are signal. Consumers are sovereign.What if markets “fail”?What is fail? Too few or too many resources in specific areas Macro failures Micro failures Market failures: Too few or too many resources going to a specific economic activityEconomic functions of government:Micro failures: 1. Legal framework – rule of the game Administration:Legal system – protects private propertyEnforcement of law is necessary 2. Maintain competition These notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.Avoid a monopoly system 3. Re-distribution of Income Income Tax Aren’t all taxes a re-distribution? (re-dist of fund vs re-dist for equity)Transfer payments Price controls Reallocation of resources Public v private goods Public – consumption by one person does not exclude consumption by another etc playground, transport, cops etc.Private – consumption by one person excludes consumption by another. Externalities:A consequence of an economic activity that spills over to affect third parties It can be negative or positiveThird parties: parties who are not directly involved in a given activity or transaction Property rights: The rights of an owner to use and to exchange propertyResource misallocations of externalitiesExternal costs – market over allocates Government can correct negative externalitiesSpecial taxes – pollution tax or effluent fee
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