Market Failure Warm-up: What are three benefits of a market system? Name a situation where markets don’t work.

Market Failure Defined South Park and Market Failure When a market does not allocate resources in a manner that is best for society. Over allocation of resources to goods or services that don’t benefit society Under allocation of resources to goods or services that would benefit society.

Externalities To understand market failure it is important to understand externalities, they come in two flavors . . . . Positive or Negative Externalities: positive benefits or negative costs not represented in an economic model. A consequence experienced by a third party that isn’t part of the economic transaction.

First, some definitions: Rivalrous Nonrivalrous Excludable Nonexcludable Private goods – rivalrous and excludable Public goods- nonrivalrous and nonexcludable.

3 Cases where markets fail: Existence of Externalities Lack of public goods Underprovision of merit goods Overproduction of demerit goods Environmental degradation Inequality in distribution of wealth and income. Abuse of monopoly power.

A Market Failure: Fast Food Trash Wrappers As you listen to the NPR story the following questions on your own paper: What is the market failure? What action is government taking? Based on the government action, is this a positive or negative externality? Explain. Does the government action to correct the market failure provide the appropriate amount of incentives to be successful? Justify.

Summary of Government Actions to address Market Failure: Subsidize merit goods Tax demerit goods Advertise to encourage or discourage demand International cooperation among governments Tradable permits Extension of property rights.

Mr. Clifford and Anchorman Check out these graphs! Social Cost of Carbon Externalities Clip from The Office