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Market Failures and Government Intervention

This chapter explores the concept of market failures, including inadequate competition, inadequate information, resource immobility, and externalities. It also examines the role of government in addressing these market failures through anti-trust legislation, regulation, and public disclosure.

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Market Failures and Government Intervention

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  1. Chapter 7

  2. Section 1: Use your guided reading

  3. Opener: • Please get out homework/classwork from yesterday and answer the following: • Does an oligopoly have a few or many sellers in the market? • Voting shareholders hold what type of stock? Preferred or Common? • Define the following: • Market failure • Externality • Positive externality • Negative externality • Public goods

  4. Section 2: Market Failures

  5. Free Enterprise • Free enterprise economies work best when 4 conditions are met • 1) adequate competition exists • 2) buyers and sellers must be reasonably well-informed • 3) resources must be free to move from 1 industry to another • 4) prices reflect cost of production

  6. Inadequate Competition • Consequences: • Inefficient resource allocation: if one company dominates, then they are less likely allocate responsibly • Higher prices and reduced output • Economic and Political Power

  7. Inadequate Information • If information is hard to obtain, then this can lead to a market failure • Questions about surpluses, wages, prices, etc have to be answered on a daily basis

  8. Resource Immobility • Many resources tend to stay put and remain unemployed, such as labor, instead of going to the market where they get the highest return • (Ex. Business closes and not everyone finds new jobs, or are not willing to move)

  9. Externalities • Definition: unintended side effect that either benefits or harms a 3rd party not involved in the activity that caused it • Negative Externality (Ex. Airport expansion causes new noise in community; new Walmart causes more traffic) • Positive Externality (Ex. The jobs created by these 2 things being built) • Market failures b/c their costs & benefits are not reflected in market prices that buyers and sellers pay for the original product (Ex. Prices air travelers pay will not reflect the cost and benefits of the airport expansion)

  10. Public Goods • Products consumed by everyone that are collectively consumed by everyone and whose use by 1 individual does not diminish the satisfaction or value available to others (national defense) • A free market cannot supply these things, so the government has to (this is why they are called PUBLIC)

  11. Section 3 The Role of Government

  12. Anti-Trust Legislation (Figure 7.3) • Trusts- legally formed combinations of corporations or companies • Sherman Anti-Trust Act (1890) • Outlawed all contracts “in restraint of trade” to halt the growth of trusts and monopolies • Clayton Anti-Trust Act (1914) • Outlawed price discrimination and gave government more power • Federal Commission Act (1914) • Est. the Federal Trade Commission (FTC) to regulate unfair methods of competition in interstate commerce • Gave government power to issue cease and desist orders • Robinson-Patman Act (1936) • Companies could no longer offer special discounts to some customers while denying them to others

  13. Government Regulation • Regulate many monopolies (power, cable, phone, etc) • Internalizing Externalities: • Can use tax system to lessen negative externalities • Tax polluting companies more; people buy less eventually and the government can use extra tax money to clean up • Called internalizing b/c it forces company and people buying the product to pay the cost • Prevents market failures

  14. Public Disclosure • Meant to provide public with enough info to prevent market failure due to inadequate info. • Businesses reveal info to public • Ex. Corporations have to report to the SEC

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