Monday, September 25, 2006

Class Handout for Market Failure

Lecture V(Based on Chapter 17 in the textbook).

Government and Market Failure

I) Public Goods
a. Contrasted with Private Goods
i. Non Rivalry
ii. Non excludability
b. Problems this causes for private markets
c. Examples of defense and vaccines
d. Counter-example of Broadcast Television
e. Marginal Benefit vs Marginal Cost Rule

II) Spillover effects
a. Externalities
b. Spillover costs (environmental pollution)
c. Spillover benefits (education, basic scientific research).

III) Ways to correct Spillover effects
a. Taxes and Subsidies
b. Coase Theorem
c. Direct Control
d. Market Based Approach
i. “Tragedy of the Commons”
ii. Creating a market for externality rights (i.e. property rights to pollute).

IV) Information Failures (i.e. asymmetrical information).
a. Supply and Demand, and the Perfect Competition model we will discuss later, assume perfect information about the product among buyers and sellers.
b. If not, and one party has more relevant information than the other, then resources may not be allocated efficiently.
c. Health care example.
d. Moral Hazard Problem.
e. Adverse Selection.

Next Class: The flip side of this problem, government failure. There is no good chapter in the textbook on this so I will be providing all relevant textbook material you will need free online.