● Occurs when resources are not allocated efficiency (P = MC)
○ Imperfect competition
○ Externalities
○ Public goods
○ Imperfect information
■ Buyers and sellers don’t have full knowledge about available markets, prices, products, customers, suppliers, and so forth
■ Ex. Consumers pay too much for a product because they aren’t aware of a cheaper alternative
● Costs and benefits felt beyond those causing the effects → spillover effects
● Lead to inefficient allocation of resources as those making decisions fail to consider all of the repercussions of their behavior
○ Lead to overconsumption of a good
○ Restricting output to the socially optimal quantity
○ Imposing a price floor at the socially optimal price
○ Lead to underconsumption of a good
○ Solution
■ Can be subsidized by the amount of the MEB
● Those that many individuals benefit from at the same time
● Key characteristics
○ Nonrival in consumption
■ One person’s consumption doesn’t affect its consumption by others
● Nonexcludable
○ Goods cannot be held back from those who desire access
○ Ex. the police cannot choose who they protect
○ Consumer attempts to benefit from a public good without paying for it
○ Consumers know they can enjoy the provision of these goods without paying for them
○ Thus, the gov. oftentimes provides these goods and pays for them through taxes
● Poverty line: Official benchmark of poverty
● Progressive tax: Gov. receives a larger percentage of revenue from families with larger incomes
● Regressive tax: Government receives a larger percentage of revenue from families with smaller incomes
● Proportional tax: Government receives the same percentage of income from all families
● Social Security: Provides cash benefits and health insurance to retired and disabled works and their families