AP Economics: Chapter 30

Government & Market Failure

I. Public GoodsGoods 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 by one party to a K is not known by the

other & he incurs major costs.