MARKET FAILURES PUBLIC GOODS AND EXTERNALITIES Market Failures

MARKET FAILURES PUBLIC GOODS AND EXTERNALITIES

Market Failures • The free-market doesn’t distribute resources efficiently • Free riders • No profit incentive for producers • Consumers unable or unwilling to pay individually if given the choice. Yet they can harm or be harmed by not receiving the good.

Public Good a shared good or service in which it would be impractical or inefficient to • To make consumers pay individually • To exclude those who did not pay

Public goods are paid for collectively by all tax paying citizens

Cost & Benefits Governments act in the public interest when they determine the benefits of a policy outweigh the costs. Criteria • The benefit is less to each individual than the cost if they were to each pay individually • The total benefits to society are greater than the cost

Why governments intervene – the good news • Consumer information • Public Health • Public Safety • Well-being of society

Government Interference – the bad news • High costs to business resulting in lower profits and slow growth • Higher costs to consumers • Higher taxes for producers & consumers

Externalities Positive externality Negative externality • Side effect that benefits someone other than the producer or consumer • Side effect that costs someone other than the producer or consumer