|
We have learned in lessons 2a and 3c
that competitive markets are usually efficient. This is one
of the benefits of a market economy or capitalism. But
sometimes markets fail to be allocatively inefficient.
In lesson 5a we learned that when
negative externalities exist, a market will
produce too much of a good or service (an overallocation of
resources) and therefore the government should tax the
product (like gasoline taxes) to get consumers to buy less,
i.e. without the tax the price of gasoline is too
low.
In this lesson we will look at three
other market failures, positive externalities,
public goods, and the tragedy of the commons.
With the first two the market produces too little (an
underallocation of resources). The goal of government then
is to increase production. With the tragedy of the
commons the market produces too much and the goal of
government is to reduce production.
Be careful. Remember, economists
often change the definitions of words. When we discuss
"public goods" we do NOT mean public schools, public parks,
or public libraries. They are NOT public goods according to
our definition.
In later lessons (10 and 11) we will
discuss another market failure: the lack of
competition. If a market is not competitive, like
when it is a monopoly or an oligopoly, then profit
maximizing businesses will produce less than the
allocatively efficient amount. The invisible hand of
capitalism does not work well if the market is not
competitive.
When do product markets fail to be
allocatively efficient?
1. when there is not
competition (monopolies and oligopolies - lessons 10a,
10b, 11a, and 11b)
2. when the government sets the price (price ceilings and
price floors - lesson 5a)
3. when the supply curve does not
include all of the costs of producing or consuming the
product (negative externalities - lesson 5a)
4. when the demand curve does not include all of the
benefits of consumption (positive externalities - lesson
5b)
5. when the products are "public goods" (lesson 5b)
6. when there is a Tragedy of the Commons (lesson
5b)
|
