L E C T U R E # 5 M A R K E T FA I L U R E S : E X T E R N A L I T I E S

W H Y W E M A K E B A D D E C I S I O N S

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M A R K E T FA I L U R E S :

• When free markets do not distribute resources efficiently

E X T E R N A L I T I E S

• When the user or producer of a private good does not bear all of the costs/benefits associated with the use or production of that good.

• It occurs because the ownership is not clearly defined and/or it is incomplete

• Can be positive (beneficial) or negative (harmful)

P O S I T I V E E X T E R N A L I T I E S

• Beautiful Garden

• Schools

• Lo-Jack

• Mosquito-abatement

• Networks (phone, internet, airlines)

• Competition in the market

• Helping someone (good samaritan)

N E G AT I V E E X T E R N A L I T I E S

• Smoking

• Driving

• Pollution

• Nuclear Tests

• Farm animal production

• Alcohol consumption

• Cell phones

• Bright lights at night

E C O N O M I C G O O D

P U B L I C G O O D

P R I VAT E G O O D

S C A R C E

F R E E G O O D

N O T S C A R C E

T Y P E O F G O O D S

• Economic Good: A good that is scarce, one that people will sacrifice to obtain

• Free Good: A good that is not considered scarce, that is, people do not want it, even if it is free

E C O N O M I C G O O D S : S C A R C E

• Private goods:

• Exclusivity means you don’t get it if you don’t pay for it

• Ownership is clearly defined

• Public goods (Common Goods):

• A good held in common, a good that is owned collectively or not owned at all, and its use does not preclude others from using it (e.g.: The freeway.)

• Goods that are inefficient to exclude customers and therefore the market does not provide them.