Chapter 7 Section 2 Notes How Markets Fail? Inadequate Competition A decrease in competition has several consequences Allows for the inefficient use of resources (jets, high salaries, etc.) Monopolies allow restricted production (shortages) and higher prices A lack of competition would allow a business to gain political influence (tax breaks or we move) Market failures do occur on the demand side, but are difficult to correct (Anyone interested in buying a space shuttle?)

Chapter 7 Section 2 Notes How Markets Fail? Inadequate Information If resources are to be allocated efficiently everyone (consumers, businesses, and gov’t) must have adequate information about market conditions Information that is needed: wages, prices, output levels, available jobs, etc. If information is difficult to obtain then it is an example of a market failure (food labels)

Chapter 7 Section 2 Notes Resource Immobility Land, labor, capital and entrepreneurs need to move to markets where returns are the highest Instead they tend to stay put and remain unused or unemployed Resources immobility is one of the most difficult problems in the economy Example: Automobile factory shuts down, 1000s are laid- off (does everyone find a new job?)

Chapter 7 Section 2 Notes Externalities A negative externality is a cost or inconvenience suffered by a 3 rd party because of actions by others What are possible negatives to putting in a movie theater? A positive externality is a benefit received by someone who had nothing to do with the activity that generated the benefit What are possible positives to putting in a movie theater?

Chapter 7 Section 2 Notes Public Goods Products that are collectively used by everyone, and whose use by one individual does not diminish the satisfaction to others Examples: defense, uncrowded roads, police and fire protection The market does not supply these items, or only supplies them inadequately A market economy produces only those items that can be withheld if people refuse to pay for them (defense)