Market Failures and Government Intervention

Market Failures and Government Intervention
Market Failures and Government Intervention
Question 2
a) private marginal cost; social marginal cost; externalities
b) equal c) negative; greater than; many
d) positive; less than; few e) negotiate; transactions costs
Question 4
The key to this question is to clearly identify the “action” in question, and then to
determine whether this action imposes costs or confers benefits on third parties. The
relevant action is shown in boldface and the MCS and MCP apply to this action.
Positive or negative
externality?
MCS greater than or less
than MCP?
Blow smoke in others’
faces.
Smoking generates a
negative externality
Market Failures and Government Intervention
(assuming that the others do
not like the smoke in their
faces).
MCS > MCP.
Cut your lawn early on
Sunday morning.
Cutting your lawn
generates a negative
externality (assuming that
others want to sleep on
Sunday mornings).
There is a cost to others, so
MCS > MCP.
A firm conducts R

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