SESSION 10: MARKET FAILURES (CONT SESSION 10: MARKET FAILURES (CONT.), INCOME REDISTRIBUTION, AND THE ROLE OF THE GOVERNMENT Talking Points Market Failures 1. Public goods and services are both non-rival in consumption (one person’s use or consumption of the good or service does not affect another person’s ability to also consume the good or service) and b. non-excludable (non-payers cannot be excluded from receiving the benefits of the good or service if it is provided).

Session 10: Talking Points, Cont’d Market Failures 2. Examples of public goods include light from a lighthouse, ecological benefits from the Amazon rainforest, levee protection, over-the-air radio/TV broadcasts, and a fireworks display. a. Public goods offer benefits to people whether they pay for them or not. For example, ships benefit from the light provided by a lighthouse whether they pay to use the lighthouse or not. b. Because people are able to benefit from public goods without paying, they have an incentive to be “free riders”—that is, to enjoy the benefits without making any payment. c. Because suppliers are unable to collect payment from free riders to pay for public goods, it isn’t profitable to produce these goods. As a result, markets (i) fail to produce the goods or (ii) produce a quantity that is less than efficient.

Session 10: Talking Points, Cont’d Market Failures 3. Governments often correct for this market failure by providing public goods. Governments provide many goods and services, but only some of them, such as national defense, are public goods as defined by the characteristics above. That is, only some of the goods government provides are non-excludable and non-rival. Income Distribution 1. People’s income is based on the quantity and quality of the resources they own.

Session 10: Talking Points, Cont’d Role of Government 1. The two fundamental roles for the government in the economy are to a. ensure that the underlying conditions for markets to achieve an efficient allocation of resources are met and b. ensure macroeconomic stability: economic growth, full employment, and stable prices (see fiscal and monetary policy in Session 15).

Session 10: Talking Points, Cont’d Role of Government 2. Government failure occurs when the government takes actions that impede the attainment of an efficient allocation of resources or macroeconomic stability (price controls, some taxes and regulations, large debt, policies that cost more than the benefits they provide, and so on). 3. The government enters as another player in the circular flow: It collects taxes from consumers and producers and then uses those funds to a. purchase and provide goods and services and b. provide transfer payments.

Lesson 10.1: Visual 1: Points Totals

Visual 10A: The Economic Role of the Government