Topic 4 · micro
Market Failures
Sometimes the market on its own allocates resources inefficiently — that is a market failure.
Externalities
An externality is the effect of a transaction on third parties. Negative ones (pollution) — the market produces too much; positive ones (education) — too little.
Public goods
Non-excludable and non-rival (street lighting). The market underprovides them — a role for the state is needed.
Government action
The state corrects failures: taxes on the harmful, subsidies for the useful, regulation, and providing public goods.
🎯 Now possible
- explain externalities
- recognize public goods
- name ways the state intervenes
Cheat sheet
Negative externality → overproduction
Positive externality → underproduction
The market underprovides public goods
Tax — against the harmful, subsidy — for the useful
Practice on this topic
Where to read more: Мэнкью — гл. 10–11Макконнелл–Брю — гл. 5