Micro 2/7

Quiz 4 is on Supply and Demand shifts and the following…

On the test, one thing will affect only one curve
Market failure: something that prevents the market from hitting equilibrium; “stops market from functioning properly
Market failure has 5 categories:
1. Lack of competition (monopoly)
2. Lack of information
3. Externalities
4. Public goods
5. Income distribution

Lack of competition
-monopoly: one seller (Standard Oil is the closest thing to monopoly with power, AMA license for doctors); monopolies are fixed by an Antitrust policy & regulation
-Anticompetitive behavior (pricing below costs like Walmart; collusion which is firms working together to act like a monopoly like OPEC)
Lack of information
-Asymmetric information: 1 party knows more than other parties (doctor and gives lots of tests; being taken advantage of, red M&Ms, Teacher, used cars)
-the fix: FDA (which is time & $$ consuming) & licensing & CarFax (evaluations)
Externalities
-when a 3rd party is affected by the market
1. negative externality- over provided (Q too high)
-3rd party is hurt (pollution, second hand smoke, drunk driving)
2. Positive externality- under-provided (Q too low)
-3rd party is helped (radio from another like dj, education)

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