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Econ 2.4
Learning

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|arket Failure can occur in a number of
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|arket Failure Examples
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Examples of goods which the market fails to provide in
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ÿraphing externalities
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 of public goods
 


 
 Financial intervention:   (equal to the   
  

 monetary value of the MEC) are imposed on l˜eaves space for market forces to interact
individuals or a firm, internalizing ECs lProvision of revenue for the government

   
lèifficulty in valuating EC
lOvervaluation means output is below social
optimum, as with undervaluation means that output
is not sufficiently lowered (ie, society͛s welfare is not
always maximized)
lEffectiveness of tax dependent on PEè
˜egislation:   and 

 
  are Enforcement is difficult and expensive
passed to prohibit or regulate behaviour that
imposes an EC, e.g. pollution permits
Education, campaigns and advertisements solve Benefits must outweigh the costs of implementation.
the problem of imperfect information by A lot of time may be needed for effects to be felt
allowing the external costs to be made known to
the consumer, discouraging demand
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 Financial intervention:  

 made to the   
  

 producer or consumer lConsidered the most effective way of solving
underconsumption as it is easily implemented

   
l˜ike taxes, the valuation of EB is difficult
lHigh government expenditure is required
lOkun͛s leaky bucket: each dollar transferred from a
richer to a poorer individual, results in less than a
dollar increase in income for the recipient. ˜eaks
arise as a result of administrative costs, changes in
work effort, attitudes etc. arising from the
redistribution

˜egislation include regulation seatbelt usage, Enforcement requires constant checking which may
compulsory education etc. translate to high costs.
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 Vhere is a need to produce merit goods (which are naturally underconsumed) at low prices or for free due

 to four reasons
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: they should be provided according to need and not ability to pay
  

  

, for example in the provision of free health services helps to contain and
combat the spread of disease
   are subject to their guardians decision which are not necessarily the best, therefore the
provision of services like free education and dental treatment is needed to protect dependants from
uninformed or bad decisions
  : Vhe problem of imperfect information makes consumers unaware of the positive
externalities and benefits that arise from consumption

  Imposition of a lump-sum tax on a monopolist (shifts AC upwards), and supernormal profits are taken as
  tax. Governments may also regulate MC/AC pricing for monopolies.

Government may impose regulations to control a monopolies


1.Forbidding the formation of monopolies (e.g., antitrust laws)
2.Forbidding monopolistic behaviour (like predatory pricing)
3.Ensuring standards of provision.
4.Ensuring competition exists (e.g., deregulation)
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