Government & Market Failure AP Economics: Chapter 30 Government & Market Failure

I. Public Goods Goods that are indivisible and used by everyone (ex I. Public Goods Goods that are indivisible and used by everyone (ex. national defense, parks) A. Collective D & S for Public Good: B. How much (Q) and at what price should we produce? Up to the point where MB=MC.

II. Externality/ Spillover When an act causes a cost or benefit to third party. (2 types) A. Spillover Costs > when a third party bears part of suppliers costs. Their MC is thus lower. See graph below: 1. There is Overallocation of resources a. ex. Company polluting

B. Spillover Benefits > when a third party bears part of the benefit of an act. See graph below: 1. There is underallocation of resources a. ex. a company creating a vaccine production

C. Two approaches to solved problem of spillover cost & benefits: the gov can tax or sell pollution rights.

III. Pollution A closer look at this externality A. 4 causes of excessive pollution. 1. Population density 2. Material consumption 3. Mass producing technology 4. “Tragedy of the Commons” > outstanding overuse & abuse of common resources without taking responsibility.

B. Superfund Law of 1980 > taxed producers of toxic chemicals & placed $ in fund used by the EPA. C. Clean Air Act of 1990 > set max pollution standards in certain industries. D. Recycling > fining non-recycling/ rewarding recycling.

IV. Information Failures Another form of Market Failure A. Asymmetric Info > B & S have unequal knowledge about transaction. 1. Inadequate info about sellers and their product > ex. No regulation on gas station’s honesty in response to gallons being pumped. 2. Inadequate info about buyers (2 types) > a. moral hazard problem > one party to a K alters behavior afterward in a way that harms the other party.

b. Averse selection problem> info known b. Averse selection problem> info known by one party to a K is not known by the other & he incurs major costs.