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Unit 6: Market Failures and the Role of the Government

Explore the concept of market failure and the role of the government in providing public goods. Learn why the free market fails to provide these goods and how the government determines the quantity to produce.

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Unit 6: Market Failures and the Role of the Government

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  1. Unit 6: Market Failures and the Role of the Government 1

  2. Review • List the characteristics of the Free Market. • Define Market Failure. • What is the “invisible hand”? • List the 4 Market Failures. • Why must the government provide public goods? • Define Free Rider. • What is wrong with having free riders?

  3. Market Failure #1 PUBLIC GOODS Why doesn’t the free market provide them? There is little opportunity to earn profit. Why NOT? Individuals benefit without paying.

  4. How do we decide how many public goods we need? 4

  5. Can the government… • Prevent wild fires in San Diego forever? • Ensure that no one ever speeds on the freeway? • Create a research station on Mars? • Stop pollution from fossil fuels? • Completely stop illegal immigration? • Make sure everyone in the US has a job? YES! But the costs outweigh the benefits. How does the government decide how many public goods to provide?

  6. How does the government determine what quantity of public goods to produce? They use Supply and Demand Demand for Public Goods- The Marginal Social Benefit of the good determined by citizens willingness to pay. Supply of Public Goods- The Marginal Social Cost of providing each additional quantity. Video: Dam Tragedy

  7. Demand for a New Park Marginal willingness to pay higher taxes Assume: • There are only two people in society. • Each additional park costs $5 How many parks should be made?

  8. Demand for a New Park Marginal willingness to pay higher taxes

  9. Demand for a New Park Marginal willingness to pay higher taxes

  10. Supply and Demand for Public Parks Price The Demand is equal to the marginal benefit of society $ 9 7 5 3 1 D=MSB 0 1 2 3 4 5 Quantity of Parks

  11. Supply and Demand for Public Parks • What if the government made 1 park? • What if the government made 4 parks? Price $ 9 7 5 3 1 MSB = MSC S=MSC The supply is the public good’s marginal cost to society D=MSB 0 1 2 3 4 5 Quantity of Parks

  12. Video: Defending the Free Market System 12

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