Chapter 14: Market Failures
Warm Up:
1.
Justify the Village of Kenmore’s decision to raise taxes to widen Delaware Avenue.
2.
Justify the Food and Drug Administration’s policy that all ingredients be labeled on all food products purchased.
3.
Justify the Federal Government’s decision to take the Microsoft Corporation to court.

• Justify Erie County’s decision to give $18 million to Bass Pro to come to downtown
Buffalo.
• Justify the FDA’s policy that all ingredients be labeled on all food products purchased.
• Justify the Federal Government’s decision to take the Microsoft Corp. to court.
• Justify the Village of Kenmore’s decision to raise taxes to widen Delaware Avenue.

Adam Smith stated that the Invisible Hand of the market place will correct all situations without any government control. However modern economists have defined four different occasions when the market does fail and there is need for intervention from the government.
Market Failures:
1. Imperfect Information 2. Externality
3. Imperfect Competition
4. Public Goods

Externalities unintended side effect that are either costs or benefits resulting from production felt by parties outside of the production of that good or service.
Ex) Pollution (love canal, noise, water)
Congestion
Casino
Waterfront Development (Bass Pro)

• The total marginal costs to society
• MC is the private cost of producing the product
• The externality is the cost above the
MC {a.k.a. MDC: marginal damage cost}

GRAPH:
Industry
Price
S
Cost
Firm
MSC
MC
P
X
P
X
MDC
MR
D
Quantity
Q
X
Output

• Pass the cost/benefit felt by society off to the firm
– Penalty to firms = value of externality

GRAPH:
S
1
MSC
MC
Price
P new
S
0
Cost
P
X
MR
D
Quantity
Q
X
Output
Taxes on the firm will decrease supply and thus raise the price

• Subsidize
$ to firms that benefit society (Bass
Pro, College Education)

• Benefits all
• No one is excluded
• Ex) National Defense
Schools Fire
Police Sanitation
Infrastructure
• Problem:_________________________
• People can enjoy without paying so usually they are unwilling to pay
Solution: use people’s taxes to pay

Government Needed: to fix market failures
Failure
Externalities
Government Fix
Tax bad ~ subsidize good
Public Goods
Provide them
Inadequate
Information
Imperfect
Competition
Truth in Ad laws / FDA / FCC
Anti-Trust Laws / FTC / SEC /
ICC

Get your index card numbered 1 – 10 and be ready!!!!
Your Category is…..

10. Administration of Justice
9. Transportation
8. Veteren’s Benefits
7. Education
6. Interest Payments on Loans
5. Health
4. Income Security
3. Medicare
2. National Defense
1. Social Security

The Top Ten States with the
Most Executions
10. Arkansas
9. Alabama
8. South Carolina
7. Georgia
6. North Carolina
5. Florida
4. Missouri
3. Oklahoma
2. Virginia
1. Texas