5 Reasons Why Markets Fail Chapter 7-2

1. Inadequate Competition Inefficient Resource Allocation Inefficient Resource Allocation a firm does not use resources efficiently a firm does not use resources efficiently Economic & Political Power Economic & Political Power firms back certain politicians that will support their business firms back certain politicians that will support their business

2. Inadequate Information When knowledge that is important to buyers is hard to find, failure may occur When knowledge that is important to buyers is hard to find, failure may occur (least likely due to the gov’t support of the internet) (least likely due to the gov’t support of the internet)

3. Resource Immobility The 4 factors do not move to markets where returns are highest The 4 factors do not move to markets where returns are highest Ex. Continental and United merged Ex. Continental and United merged Some will find work in the same town Some will find work in the same town Some people will move to find work Some people will move to find work Some will not be able to sell their houses Some will not be able to sell their houses Some do not want to leave their hometown Some do not want to leave their hometown

4. Externalities (unintended side effect to a 3 rd party) (unintended side effect to a 3 rd party) Negative Externality =harm, cost or inconvenience suffered by a 3 rd party Negative Externality =harm, cost or inconvenience suffered by a 3 rd party Ex. Noise pollution caused by a new wing at the airport Ex. Noise pollution caused by a new wing at the airport Positive Externality =benefit received by a 3 rd party that had nothing to do with the activity Positive Externality =benefit received by a 3 rd party that had nothing to do with the activity Ex. Restaurant gets more business because of airport expansion Ex. Restaurant gets more business because of airport expansion

5. Public Goods Need for goods that are collectively used by the public Need for goods that are collectively used by the public National defense National defense Police Police Fire Fire Highways Highways Difficult to collect $ for everyone’s “fair share” Difficult to collect $ for everyone’s “fair share”

Individual Classwork—8 questions Write 4 multiple choice questions with four answer choices. Write 4 multiple choice questions with four answer choices. Write 4 true/false questions. Write 4 true/false questions. Questions can be over sections 1, 2 and or Tucker, The Man and His Dream Questions can be over sections 1, 2 and or Tucker, The Man and His Dream The better your questions are, the better the class review will be. The better your questions are, the better the class review will be. DUE TODAY DUE TODAY