AP Micro/Wolters
Ch. 5, pages 80-83
GOVERNMENT AND MARKET FAILURE
Markets are usually a good way to organize economic activity. Prices are the instrument with which the
“invisible hand” directs the economy. But occasionally there are market failures –situations in which the
market left on its own fails to allocate resources efficiently. In these situations the government can
intervene in the economy to help achieve the economy’s goals of efficiency and equity.
Read pages 80-83 and define/answer the following:
1.
What is a spillover, or externality?
a.
How can the government correct for spillover costs (an overallocation of resources to the
production of a good)?
b.
How can the government correct for spillover benefits (an underallocation of resources
to the product)?
2.
Markets can supply only private goods efficiently. A private good is excludable—people can be
prevented from using it—and rival in consumption—one person's use of the good diminishes other
people's use, or it is impossible for the same unit of a good to be consumed by more than one person at
the same time.
A public good is both non-excludable and non-rival in consumption (or subject to shared consumption).
Some goods have characteristics of both public and private goods. Common resources, like fish in the
ocean, are generally non-excludable, but if one person catches a fish, it is not available to anyone else, so
fishing is rival in consumption.
Certain other goods, like a bridge, would be characterized as nonrival in consumption, but if it is a toll
bridge, then it is excludable. These goods are called toll goods, or artificially scarce goods.
The following chart depicts four types of goods—public, private, common resources, and artificially
scarce goods (nonrival, but excludable). Place each of the goods/services listed below into the
appropriate box:
1.
2.
3.
4.
5.
6.
7.
haircut
wheat
pay-per-view movies
street lights
toll roads
police and fire protection
clean water
Rival in Consumption
Nonrival in consumption
PRIVATE GOODS
ARTIFICALLY SCARCE GOODS
COMMON RESOURCES
PUBLIC GOODS
Excludable
Nonexcludable
3.
What is the free-rider problem?
4.
What is a quasi-public good or service?
5.
How does the government reallocate resources from private to public goods?