Externalities and Market Failures
A. Externalities
● Definition: Costs or benefits not reflected in market transactions.
○ Positive Externalities: Vaccinations, education.
○ Negative Externalities: Pollution, traffic congestion.
● Government Solutions:
○ Positive: Subsidies, public provision.
○ Negative: Taxes (Pigouvian tax), regulations, tradable permits.
B. Public Goods
● Characteristics: Non-excludable, non-rival.
○ Examples: National defense, lighthouse services.
● Issue: Free-rider problem, under-provision in private markets.
C. Asymmetric Information
● Adverse Selection: Pre-contract issue (e.g., insurance markets).
● Moral Hazard: Post-contract issue (e.g., riskier behavior after buying insurance).
A. Externalities
● Definition: Costs or benefits not reflected in market transactions.
○ Positive Externalities: Vaccinations, education.
○ Negative Externalities: Pollution, traffic congestion.
● Government Solutions:
○ Positive: Subsidies, public provision.
○ Negative: Taxes (Pigouvian tax), regulations, tradable permits.
B. Public Goods
● Characteristics: Non-excludable, non-rival.
○ Examples: National defense, lighthouse services.
● Issue: Free-rider problem, under-provision in private markets.
C. Asymmetric Information
● Adverse Selection: Pre-contract issue (e.g., insurance markets).
● Moral Hazard: Post-contract issue (e.g., riskier behavior after buying insurance).
