Market Failures
As we studied market structures, you learned that most fall
into the broad category of imperfect competition.
Because these structures do not allocate goods and services
in the most efficient way, economists call them market
failures.
market failure - a situation in which the market fails
to allocate resources efficiently
But imperfect competition is not the only form of
economic inefficiency.
Externalities
You might think of externalities as spillover effects, either costs or
benefits, resulting from the actions of companies or individuals.
externality- a cost or benefit that arises from production
or consumption of a good or service that falls on
someone other than the producer or consumer
Negative Externalities
negative externality - a cost of production or consumption
that falls on someone other than the producer or
consumer; a negative side effect
When a factory dumps
chemical waste into a river
and the polluted water
affects the health of people
who live downstream.
Negative Externalities
When a neighbor holds a
party with loud music that
keeps you up at night.
Positive Externalities
positive externality - a benefit of production or
consumption that falls on someone other than the
producer or consumer; a positive side effect
Students who get a college
education benefit directly by
getting higher-paying jobs. But if
their success also results in
greater economic prosperity for
their communities, that is a
positive externality
Positive Externalities
An person receiving a
vaccination not only
decreases the likelihood of
the individual's own
infection, but also decreases
the likelihood of others
becoming infected through
contact with the individual.
Public Goods
You might remember public goods & services as those provided by
the government that benefit all people at the same time.
When we look at public goods & services as a market failure, the
definition is slightly different.
public goods - goods and services that are not provided
by the market system because of the difficulty of getting
people who use them to pay for their use.
Public Goods
Fire & Police services
National Defense
Public Parks
Private Goods
Private goods are different from public goods in that they are not
paid for by the government and they are sold in markets for a profit.
The business that produce these goods are owned and operated by
private citizens not governments.
private goods - goods and services that are sold in
markets; distinct from public goods
Private Goods
Repair
services
Delicious snacks
Theme
Parks
Public vs. Private Goods
Public vs. Private Goods
Economists make two key distinctions between public & private goods.
First, private goods are excludable. This means that anyone who does
not pay for the good can be excluded from using it. A grocery store, for
example, will sell apples only to customers willing to pay for them.
Public goods, on the other hand, are nonexcludable. Think of
streetlights. How could you prevent some people from using the
light from streetlights? You could not.
This makes them nonexcludable.
Public vs. Private Goods
Second, private goods are said to be rival in consumption, which
means that a good cannot be consumed by more than one person at
the same time. Thus, for example, if you buy an apple and eat it, that
apple is no longer available for anyone else to eat.
In contrast, public goods are nonrival in consumption. One
person’s use of a streetlight’s glow does not diminish another’s
ability to use its light as well.
Public vs. Private Goods
Private Good
Provided by Market
System?
Excludable?
Rival in
consumption?
BLOCK
Yes; producers can sell
private goods for profit.
Public Good
No; no incentive for
producers; the government
must provide.
BLOCK
Yes; available only to
consumers who purchase the No; available to everyone.
product.
BLOCK
BLOCK
Yes; consumption by one
No; consumption by one
person prevents another from person does not prevent
consuming.
others from consuming.
BLOCK
BLOCK
Public or Private Goods?
Lets try some examples:
Excludable?
Rival in consumption?
PRIVATE
Public or Private Goods?
Excludable?
Rival in consumption?
PRIVATE
Public or Private Goods?
Excludable?
Rival in consumption?
PUBLIC
Public or Private Goods?
Congress
Excludable?
Rival in consumption?
PUBLIC
Public or Private Goods?
High School
Excludable?
Rival in consumption?
BOTH
Public or Private Goods?
Excludable?
Rival in consumption?
PRIVATE
Public or Private Goods?
Excludable?
Rival in consumption?
PUBLIC
Public or Private Goods?
Excludable?
Rival in consumption?
PRIVATE
Public or Private Goods?
Excludable?
Rival in consumption?
PUBLIC
Public or Private Goods?
Excludable?
Rival in consumption?
PUBLIC
Awesome