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Externalities: When is a Potato Chip Not Just a Potato Chip?.Graphing Positive and Negative Externalities Negative Externalities = third party cost.Positive Externalities = third party benefit.Externalities: when a third party is affected by a choice or action.Price Ceilings: An artificial barrier imposed by the government to keep prices artificially low (below equilibrium), helps consumers but hurts producers, always causes shortages.Price Floors: An artificial barrier imposed by the government to keep prices artificially high (above equilibrium), helps producers but hurts consumers, always leads to a surplus.Price Controls: Government regulates (sets) the prices.Externalities (effect to a third party, can be positive (benefit) or negative (cost)).Price and Quantity Controls(Price Floors and Price Ceilings, lead to shortages and surpluses).Taxes and Subsidies (effect quantity supplied, producing more or less than desired or the optimal level).Public Goods(government provided) – merit and demerit goods.Monopolies (allocative and productive inefficency).Therefore, the government creates market failure, but it also looked upon to correct other market failures (like monopolies).Market Failure is when the market doesn’t produce the desired results for society (self-correcting). Market Interference automatically leads to Market Failure.So the governent takes it upon itself to intervene, even though by simply intervening they are creating market failure. Market Interference = government involvement in the market (sometimes markets take a long time to reach equilibrium, society wants results NOW).

* Markets are supposed to be the medium between buyer and seller who make voluntary exchanges and produce the most efficient outcomes for society, as Adam Smith pointed out, like an “invisible hand” was guiding it to the best possible outcome, markets are supposed to be self-correcting, meaning the government should STAY OUT.

Market Failure and the Role of the Government

Economicsonline – Types of Market Failure.

Read the following (use the links on the blog):.

How do you think does the government deals with positive and negative externalities? How might private individuals account for the societal cost/benefit?.

How do you think you graph externalities? How can you tell from a graph visually when there is a positive or negative externality?.What are externalities? What do we call it when there is a benefit to a third party? What about a cost? Why do we refer to them as “spillover”?.What are price floors and price ceilings? Where are they placed? Who does each one help/hurt? What do they cause as a result?.What are the main examples/causes of market failure?.