U6: Market Failures and Government

6.1 Market Failures

● 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