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Email: gmsmith@shanahan.org
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Chapter 4 Market Efficiency, Market Failure, and Government Intervention
Chapter Outline
Chapter 4 Market Efficiency, Market Failure, and Government Intervention
Markets are efficient mechanisms for allocating resources. However, in the real world, markets can “fail” as a result of departures from the idealized competitive market structure. This chapter assesses the efficiency of markets in terms of maximizing consumer and producer surplus, and explains the circumstances under which market failures can occur. Government intervention in markets in the forms of price floors, price ceilings, and taxes is also examined.
Efficient Market Requirements
Accurate Information Is Widely Available
Property Rights Are Protected
Contract Obligations Are Enforced
There Are No External Costs or Benefits
Competitive Markets Prevail
The Discipline of Markets
Consumer and Producer Surplus: A Tool for Measuring Economics Efficiency
Checkpoint: Markets and Efficiency
Market Failures
Accurate Information Is Not Widely Available: Asymmetric Information
Adverse Selection
Moral Hazard
Information Markets: The Wisdom of Crowds
Problems with Property Rights
Public Goods
Common Property Resources
Contract Enforcement Is Problematical
There Are Significant External Costs or Benefits: Externalities
Competitive Markets Do Not Prevail: Monopoly Power
Checkpoint: Market Failures
Review
Government-Controlled Prices
Price Ceilings
Price Floors
Taxes and Deadweight Loss
Checkpoint: Government-Controlled Prices
Review
Who Is Watching Your Money? Bank Regulation and Information Problems
Chapter Summary
Markets and Sufficiency
Market Failures
Government-Controlled Prices
Handout 4.1
Work in small groups.
Chapter 4 True and False Questions (30 questions in round-robin fashion, you may work with a partner).
HW: gmsmith@shanahan.org
1. If we do not get to it during class today, review and have the answers (to review in-class) to #1-30, True and False Questions on Chapter 4. You do not have to email the answers; we will cover this material in class (Cf. http://shanawiki.wikispaces.com/AP+Economics+Ch.+4+True+and+False+Questions). You may, of course, answer T or F on Shanawiki outside of class and collaborate on this exercise.
