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

2. 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.

3. 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.

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

5. 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.

6. 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.

7. 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.

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