Market Failure and Government Intervention

Market Failure and Government Intervention

Externality

• Definition: An externality occurs when an economic activity affects third parties who are not directly involved in the transaction.
• Types:
  • Positive externality: A beneficial effect on third parties (e.g., a beekeeper's bees pollinate nearby crops).
  • Negative externality: A harmful effect on third parties (e.g., a factory polluting a nearby river).
• Examples:
  • Air and water pollution
  • Noise pollution
  • Positive externalities: education, research, and development
• Government intervention:
  • Pigouvian taxes: Taxing firms that generate negative externalities to internalize the cost.
  • Subsidies: Providing incentives to firms that generate positive externalities.

Public Goods

• Definition: A public good is a good or service that is non-rivalrous and non-excludable.
• Characteristics:
  • Non-rivalrous: Consumption by one person does not reduce the availability for others.
  • Non-excludable: It is difficult or impossible to exclude people from consuming the good.
• Examples:
  • National defense
  • Public parks
  • Clean air and water
• Government intervention:
  • Provision: The government provides public goods directly.
  • Regulation: The government sets rules and standards for public goods.

Monopoly Power

• Definition: A market structure in which a single firm supplies the entire market with a particular good or service.
• Characteristics:
  • Single seller
  • Barriers to entry
  • Price maker
• Negative effects:
  • Higher prices
  • Reduced output
  • Inefficiency
• Government intervention:
  • Antitrust laws: Regulating and breaking up monopolies to promote competition.
  • Regulation: Setting prices and output levels to prevent abuse of monopoly power.
  • Public ownership: The government takes ownership of the monopoly to ensure public interest.