1. Present two examples of market failures (besides pure public goods).
Based on: H.S. Rosen, Gayer T. (2010), Public Finance, The McGraw Hill
Jan Gromadzki

2. Reasons for government intervention
distributional goals of the society
market failures

3. Perfect competition
Pareto efficiency

4. Market failure Market power - price making behavior
Nonexistence of Markets
- asymetric information
- externality
- public good

5. Asymetric information
a situation in which one party engaged in an economic transaction has better information about the good or service traded than the other party
Immediately after purchase the value of a car drops substantially
Why?
A seller has more information about the car than a buyer
A buyer is aware of this fact so he/she demands a compensation for the risk

6. Externality
A cost or benefit that occurs when the activity of one entity directly affects the welfare of another in a way that is outside market mechanism

7. externality: pollution
Copyright: M. A. Allers

8. coase theorem
The efficient solution will be achieved indpendently of who is assigned the property rights, as long as someone is assigned property rights (the right to clean air or the right to pollute)
Assumptions:
The costs to the parties of bargaining are low
The owners of resources can identify the source of damages to their property.

9. externality: intoxication