econ and env. science 387
What are the reasons why the market might fail in efficiently allocating resources
Externalities, public goods, imperfect information, inappropriate goods intervention, imperfect competition
Externality
A side effect that occurs in industry in which neither the producer or consumer pays for.
Public Good
A good that is both non-excludable(you cannot prevent people from using it who have not payed for it), and non-rivalrous. Examples include police, firemen, communication
imperfect information
when either the buyer or the seller knows too much or too little,thus providing an unfair advantage to one party. the unknown information can also cause health consequences.
imperfect competition
any market in which the sellers are selling different goods, or in which there is a small amount of sellers.
What is demand and what is it equal to?
demand is the amount of a certain product an individual is willing to pay at a range of proces; marginal benefit
What area is the total benefit?
the complete area underneath the MB line up until the desired Q*
What area in the graph is the consumer surplus?
The triangle created by the
What is consumer surplus?
it is the difference between the willingness to pay and the amount actually payed
What is the producer surplus?
it is the triangle formed by the area above the supply curve, but below the cost.(it is beneath consumer surplus)
what is net benefit?
producer surplus+consumer surplus
what is total cost?
The triangle formed underneath the supply curve.
Net benefit=total benefit-total cost
Government intervention
If the government intervenes in a market in a way that affects the market price and moves it away from the socially efficient price, then the outcome is a market failure. Example: roads provided by the US Forest Service. They may reduce the cost of timber extraction for private timber companies who lease public land.
What does efficient allocation maximize?
efficient allocation maximizes the net benefit.
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