This lecture will cover the material found in Chapter 14 of Case and Fair, Principles of Economics, 7/e. In an earlier chapter, we explored market failure resulting from too few sellers. In this chapter we will further explore market failure by examining four different explanations for market failure. We will see how these market failures arise and discuss solutions for them. By the end of this chapter, you should be able to answer the following questions:
1. What is the difference between an external cost and an external benefit?
2. Why are markets with externalities inefficient?
3. What is the difference between using taxes to solve an externality problem and using the Coase theorem?
4. Would an economist favor the banning of all pollution? Why?
5. How do public goods differ from other goods?
6. How should the government provide public goods, according to Samuelson? What are the problems with this solution?
7. How do people "vote with their feet?"
8. What are some solutions to the moral hazard and adverse selection problems?
9. What does the impossibility theorem have to say about using majority rule for making social choices?