1. 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.
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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

2. 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

3. 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.
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Section 2-4

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.
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Section 2-5

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.
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Section 2-6

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.
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Section 2-6

7. 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.
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Section 2-12

8. 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.
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Section 2-14

9. 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.
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Section 2-16

10. 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.
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Section 2-19

11. 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