1. Market Weaknesses

3. Imperfect Information
DEFINITION: Buying or selling with incomplete or erroneous info creates exchanges that are not beneficial.
EXAMPLE: Ineffective or harmful prescription drugs, loans with a deceptive interest rate.

4. Imperfect Information
GOVERNMENT INTERVENTION
Suits in court
Require disclosure of information
Regulate business practices and products.

6. Monopoly
DEFINITION: Only one seller of a good. No competition means they can raise prices and decrease output.
EXAMPLE: Microsoft?, DeBeers Diamonds, Utilities (gas, electric, telephone)

7. Monopoly GOVERNMENT INTERVENTION
Break up the monopoly into multiple firms.
Force the firm to price competitively.

9. Externalities: Definition
When an exchange hurts or helps a third party not directly involved in the exchange
External costs are imposed on someone without compensation
External benefits are received by someone without payment
Problem: Goods with external costs are overproduced, goods with external benefits are underproduced

10. Externalities: Gov’t Intervention
Define property rights
Tax products with external costs
Subsidize products with external benefits

11. Externalities: Evaluate Intervention
Sometimes difficult to define or enforce property rights (air, for example)
Difficult to know how much SHOULD be produced

12. Public Goods A good with two characteristics:
Can be consumed by one individual without reducing the amount available for others
Very difficult to exclude nonpayers from consuming the good
Examples: light house, national defense, radio and TV signals, war against international terror

13. Public Goods Weakness:
“Free rider” problem: Everyone has an incentive to consume without paying
Consequently the good is underproduced by the market (if at all)
NOTE: Markets sometimes find ways to produce a public good (radio and TV through advertising)

14. Public Goods Response:
Government collects taxes and provides the goods, especially national defense
Note: Not all goods that the government provides are public goods
Evaluation
Hard to know how much to produce
Few incentives to be efficient

15. Economic Injustice
The market distributes wealth in a way that is amoral (not necessarily immoral, it just doesn’t take into account what should be).
Often, we find it unfair when wealth is distributed based on factors such as: race, gender, family, luck, religion, etc.

16. Government Intervention
Equality of Opportunity (evening out the starting line)
Anti-discrimination laws
Public Education
Scholarships
Equality of Result (evening out the finish line)
Welfare
Social Security

17. Recession/Depression
The market economy goes through cycles
Output/employment rise and fall below what economy could produce with full employment
Measured by unemployment, GDP
above 5 or 6% is a recession, a depression is a severe recession
Recession/Depression caused by shocks to economy
♣ E.g. 9/11 Recession: downward spiral
♣ Housing Market Collapse in

18. Recession/Depression
Recession/Depression caused by shocks to economy
E.g. 9/11 Recession: downward spiral
Housing Market Collapse in
How has the current recession affected people?
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02/business/economy/economy-user- photos.html
6/business/economy/unemployment-lines.html

19. Government Intervention
Fiscal Policy (Congress and the President)
Cut taxes (e.g. Bush Tax Cut Extension)
Increase government spending (e.g. Stimulus Bill)
Monetary Policy (The Federal Reserve)
Increase money supply
Decrease interest rates