A.P. Microeconomics Chapter 14: Market Failures Warm Up: 1.Justify the Village of Kenmore’s decision to raise taxes to widen Delaware Avenue. 2.Justify the Food and Drug Administration’s policy that all ingredients be labeled on all food products purchased. 3.Justify the Federal Government’s decision to take the Microsoft Corporation to court.

Warm Up Questions Justify Erie County’s decision to give $18 million to Bass Pro to come to downtown Buffalo. Justify the FDA’s policy that all ingredients be labeled on all food products purchased. Justify the Federal Government’s decision to take the Microsoft Corp. to court. Justify the Village of Kenmore’s decision to raise taxes to widen Delaware Avenue.

Chapter 14: Market Failures Adam Smith stated that the Invisible Hand of the market place will correct all situations without any government control. However modern economists have defined four different occasions when the market does fail and there is need for intervention from the government. Market Failures: 1.Imperfect Information2. Externality 3.Imperfect Competition 4.Public Goods

Market Failures _________________: unintended side effect that are either costs or benefits resulting from production felt by parties outside of the production of that good or service. Ex) Pollution (love canal, noise, water) Congestion Casino Waterfront Development (Bass Pro) Externalities

Marginal Social Cost (MSC) The total marginal costs to society MC is the private cost of producing the product The externality is the cost above the MC {a.k.a. MDC: marginal damage cost}

Marginal Social Cost (MSC) GRAPH: IndustryFirm Quantity Price Output Cost S D PXPX PXPX MR MC QXQX MSC MDC

Internalizing Externalities Pass the cost/benefit felt by society off to the firm __________: negative externality –Penalty to firms = value of externality TAX

Internalizing Externalities GRAPH: Quantity Price Output Cost S0S0 D MR MC QXQX MSC S1S1 PXPX P new Taxes on the firm will decrease supply and thus raise the price

Internalizing Externalities ____________: positive externality, give $ to firms that benefit society (Bass Pro, College Education) Subsidize

Public Goods Benefits all No one is excluded Ex) Problem:_________________________ People can enjoy without paying so usually they are unwilling to pay National Defense SchoolsFire Police Infrastructure Sanitation Free-Rider Problem Solution: use people’s taxes to pay

Government Needed: to fix market failures FailureGovernment Fix Externalities Public Goods Inadequate Information Imperfect Competition Tax bad ~ subsidize good Provide them Truth in Ad laws / FDA / FCC Anti-Trust Laws / FTC / SEC / ICC

Top Ten Fun Get your index card numbered 1 – 10 and be ready!!!! Your Category is…..

10. Administration of Justice 9. Transportation 8. Veteren’s Benefits 7. Education 6. Interest Payments on Loans 5. Health 4. Income Security 3. Medicare 2. National Defense 1. Social Security Top Ten Areas of Federal Government Expenditure

The Top Ten States with the Most Executions 10.Arkansas 9. Alabama 8. South Carolina 7. Georgia 6. North Carolina 5. Florida 4. Missouri 3. Oklahoma 2. Virginia 1. Texas