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6.5 - Market Failure
Transcript of 6.5 - Market Failure
when markets fail to perform efficiently or according to other, widely-held social values
Supply and Demand
Objective market failure
occurs when there is no equilibrium and the market does not clear.
Subjective market failure
occurs when the basic supply and demand equation works but the outcome is somehow undesirable.
Objective Market Failures
control of the entire supply of a valued good or service by one economic actor.
Natural monopolies occur when occur when there is something about the product itself or the market for the product that severely biases the market towards one firm
a cost or benefit of the production process that's not fully included in the price of the final market transaction when the product is sold.
goods or services that cannot or will not be provided via the market because their costs are too big or their benefits are too diffuse
Subjective market failure and effective demand
Demand is the amount people are willing to pay, while effective demand is the amount that people are willing and
perverse incentives can lead to more cobras (more problems)
Uses government spending and revenue collection to influence the economy
Counter-cyclical spending to soften economic ups and downs
only monetary policy should be used to affect economic conditions
refers to the state's role in controlling money in circulation and interest rates
state intervenes directly to promote specific industries
import-substituting industrialization (ISI) policies
structural adjustment programs (SAPs): end restrictions on free trade, privatization, reduce deficits
Supply and demand interact with one another, and are linked by price.
Price allows us to give an objective, flexible worth to a commodity.
Where supply and demand are in equilibrium, we get market clearing.
Market failure occurs when an economic market does not produce or distribute the needed, or simply desired, goods and services.