MicroEconomics Notes Chapter 13 Market Failures Government Failures and Rent Seeking Economic freedom the degree to which private individuals are able to carry out voluntary exchange without government involvement linked to standards of living Market Failure Market failure occurs when the market outcome is not the socially or economically efficient outcome some action by the government is sometimes necessary to ensure that the market work well Market failure has to do with something interfering with the optimization of agents through the market process If the market provides a result we don t like doesn t mean there was a market failure Private Property Rights Private property rights the rights of individuals to own property When private property rights are secure others are not allowed to steal or damage your private property Crucial to a market Private Public and Club Goods The principle of mutual exclusivity entitled to enjoy the consumption of that property privately The principle of rivalry states service less remains for others when one consumes or uses a good or the owner of private property is Private good a good that is both excludable and rivalrous Club good a good that is excludable but non rivalrous Public good a good that is non excludable and non rivalrous Commons good a good that is rivalrous but non excludable Rivalrous Non Rivalrous Excludable Non Excludable Private Goods Examples Food Clothing Toys Furniture Pizza Club Goods Examples Cable TV Private golf courses Common Goods Examples Fish Water Air Public Goods Examples National Defense Free to air TV MP3 FIles When goods are non excludable an individual has an incentive to be a free Free rider a consumer or producer who enjoys the benefits of a good or service without paying for that good or service Free Rider rider Externalities Private costs and benefits those that are borne solely by the individuals involved in the transaction Externality a cost or benefit of a transaction that is borne by someone who is not directly involved in the transaction If externalities exist it means that those involved in the demand and supply in the market are not considering all the costs and benefits when making their market decisions As a result market fails to yield optimal results Positive and Negative Externalities Positive externality may result when some of the benefits of an activity are received by consumers or firms not directly involved in the activity Negative externality may result when some of the costs of an activity are not borne by consumers or firms not directly involved in the activity Social Cost Social cost total social cost of a transaction is the private cost plus the external cost If all costs of a transaction are borne by the participants in the transaction the private costs and social costs are the same Externalities and Market Failure When there is a divergence between social costs and private costs the result is either too much or too little production and consumption In either case resources not being used in their highest valued activity market failure may occur
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