Click the Speaker button to listen to the Cover Story. Study Guide (cont.) Objectives After studying this section, you will be able to:  Discuss the problems caused by inadequate competition.  Understand the importance of having adequate information.  Describe the nature of resource immobility.  Explain the nature of positive and negative externalities. Click the Speaker button to listen to the Cover Story. Click the mouse button or press the Space Bar to display the information. Section 2 begins on page 173 of your textbook. Section 2-3

Study Guide (cont.) Key Terms market failure  externality  negative externality  positive externality  public goods Click the mouse button or press the Space Bar to display the information. Section 2 begins on page 173 of your textbook. Section 2-2

Introduction Markets sometimes fail. How they fail, and how the failures can be remedied, is a concern for economists.  A competitive free enterprise economy works best when four conditions are met.  Adequate competition must exist in all markets.  Buyers and sellers must be reasonably well-informed about conditions and opportunities in these markets.  Resources must be free to move from one industry to another.  Finally, prices must reasonably reflect the costs of production, including the rewards to entrepreneurs. Click the mouse button or press the Space Bar to display the information. Section 2-4

Introduction (cont.) Accordingly, a market failure can occur when any of these four conditions are significantly altered.  The most common market failures involve cases of inadequate competition, inadequate information, resource immobility, external economies, and public goods.  These failures occur on both the demand and supply sides of the market. Click the mouse button or press the Space Bar to display the information. Section 2-5

Inadequate Competition Decreases in competition because of mergers and acquisitions can lead to several consequences that create market failures.  Inefficient resource allocation often results when there’s no incentive to use resources carefully.  Reduced output is one way that a monopoly can retain high prices by limiting supply. Click the mouse button or press the Space Bar to display the information. Section 2-6

Inadequate Competition (cont.) A large business can exert its economic power over politics.  Market failures on the demand side are harder to correct than failures on the supply side. Click the mouse button or press the Space Bar to display the information. Section 2-6

Inadequate Information Consumers, businesspeople, and government officials must be able to obtain market conditions easily and quickly.  If they cannot, it is an example of market failure. Click the mouse button or press the Space Bar to display the information. Section 2-12

Resource Immobility Resource immobility occurs when land, capital, labor, and entrepreneurs stay within a market where returns are slow and sometimes remain unemployed.  When resources will not or cannot move to a better market, the existing market does not always function efficiently. Click the mouse button or press the Space Bar to display the information. Section 2-14

Externalities Externalities are unintended side effects that either benefit or harm a third party.  Negative externalities are harm, cost, or inconvenience suffered by a third party.  Positive externalities are benefits received by someone who had nothing to do with the activity that created the benefit.  Externalities are market failures because the market prices that buyers and sellers pay do not reflect the costs and/or the benefits of the action. Click the mouse button or press the Space Bar to display the information. Section 2-16

Public Goods Public goods are products everyone consumes.  The market does not supply such goods because it produces only items that can be withheld if people refuse to pay for them; the need for public goods is a market failure. Click the mouse button or press the Space Bar to display the information. Section 2-19

Section Close Choose the one factor you believe is the most serious obstacle to efficient market competition and justify your choice in writing. Section 2-Assessment 8