Market Failure: Externalities - Market failure arises when a buyer and a seller agree to a transaction that imposes costs (negative externality or spillover) or benefits (positive externality/spillover) on people who were not a party to their decision.

What would illustrate this kind of failure in a model?

If all transaction costs and benefits fall on the decision-makers, the transaction

represents a step toward Pareto efficiency - this means that the decision was

voluntarily accepted by all who are affected by it.

Externalities would also exist if workers have no mechanism to transfer their costs

of being injured to their employers, who should be responsible for workplace safety.

Market Failure: Public Goods - Market failure arises when a person is willing to

consume a good or service, but they are not willing to pay the cost of its

provision/production - "free rider problem."

Free rider problem can lead to under-investment in the provision of such goods or

service unless the government can compel payments through its tax system.

What is another famous market failure related to types of goods/services?

Solutions to problems that prevent the completion of socially beneficial transactions frequently involve governmental intervention - repeal the law

Q. Think of a negative externality. How could the government help? What would illustrate this in a model?

For other types of transaction barriers, government intervention could either compel or

actively promote transactions different from those made by "the market."

Q. What does the Federal Trade Commission do?

Q. How should the government deal with AI?

Examples:

Capital Market Imperfections - If workers find it difficult to obtain loans - to be used for various

purposes - the government might intervene by making such loans available to consumers even

if it faced the same risk of default.

Externalities - Government can use policies to intervene in its decision on the mandatory

school-leaving age by looking at the lifetime benefitsof various schooling levels and comparing

them to both the direct costs of education and the opportunity costs of lost production -

internalize externalities