Main content

Market failure and the role of government

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Allocative efficiency and marginal benefitNegative externalitiesPositive externalitiesTaxes for factoring in negative externalities
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The economics of pollutionCommand-and-control regulationWhat are market-oriented environmental tools?Types of market-oriented environmental toolsThe benefits and costs of US environmental lawsInternational environmental issuesThe tradeoff between economic output and environmental protection
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Positive externalities of innovationInvesting in human capitalWhy the private sector under invests in innovation
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Tragedy of the commonsRival and excludable goodsWhat are public goods?What is a free rider?Public goods: real-world examples

About this unit

In this unit, we start exploring the arguments for and against government intervention in an otherwise competitive market. We examine the conditions for allocative efficiency, using the marginal social benefit and marginal social cost principle, and the ways in which externalities, public goods, and the market distribution of income create market failures even in competitive free-market economies. In addition, we study the effectiveness of government policies such as subsidies, taxes, quantity controls, and public provision of goods and services, which are designed to correct market failures and achieve allocative efficiency.