Market Failure
Reading Guide 2013
Section 1.4 – Market
Failure
Syllabus topics:
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Reasons for market failure  Negative externalities of production and consumption
 Positive externalities of production and consumption
 Lack of public goods
 Common access and the threat to sustainability
 Asymmetric information
 Abuse of monopoly power
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Possible government responses –
 Legislation
 Direct provision of merit and public goods
 Taxation
 Subsidies
 Tradeable permits
 Extension of property rights
 Advertising
 International cooperation
Food for thought: To what extent is the obligation to seek sustainable modes of
consumption a moral one?
How could we know if economically more developed countries are morally justified in
interfering in the development of economically less developed countries on the grounds
of climate change?
Externalities (Glanville - P. 165 – 170)
1. Before we read Glanville, use BizEd (http://www.bized.co.uk/glossary/glossary.htm)
to quickly define equity principle, and socially efficient output, externalities and explain
each of these in detail. Try to come up with examples from your own life.
2. What happens in the real world?
3. Continuing in BizEd, please include the following definitions: non-rival consumption,
free riders, non-exclusive benefits, and public goods. These are pretty important
concepts.
4. Read page 165 in Glanville and note that our previous supply and demand graphs
were private. What does that mean?
5. On page 166, explain what is unique about Oxford, England. Then copy Figure 2.98
into your notes. Explain the graph using price and quantity movements as they relate to
private and social costs and benefits.
6. Define a public good. What are its two important characteristics?
7. Why won’t the market provide a good that is non-rivalrous and non-excludable?
UnderProvision of Merit Goods (P. 169 –171)
8. Define merit good and socially optimal quantity.
9. Why does the private market fail to provide merit goods? Draw and explain
figure 2.99.
10. Write into your notes figure 2.100. Be sure to describe the shifts in P and Q.
11. How might advertising or offering merit goods for free affect demand for the
goods in question? Draw figure 2.101 and explain how a subsidy effects the
demand for a merit good?
Negative Externalities and overprovision of demerit goods (P.
171 –176)
12. On page 170, please define negative externality. Using figure 2.102, explain how
negative externality is reflected in the diagram.
13. Define demerit goods. Why does the market overprovide demerit goods?
14. What methods can the government employ to discourage the consumption of
demerit goods or externalities?
15. Draw figure 2.103 and 2.104. Explain the solutions to negative externalities being
suggested in each case.
16. On page 176, how might cultural mores impact or shape our perceptions of
externalities?
Environmental concerns (P. 176 – 178)
17. On page 176, please define and explain the following concerns as they relate to
the environment and externalities:
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
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Polluting activities
Valuing external costs…how is this difficult?
Social cost – benefit analysis
We’ll address abuse of monopoly power later. Stay tuned for government responses!