4. Micro -- Market Failure, Inequality/Poverty, the Role of Government -- Dunbar

Market Failure

This exists when the free/private market outcome is not the same as the most socially desirable outcome.

Externalities

Benefits or costs of an activity (consumption or production) that are borne by people not directly involved in the activity.

Positive Externalities

Benefits that spill over onto third parties who were not directly involved in a transaction (e.g. secondary and post-secondary education benefits society and not just the individual student and school).

Negative Externalities

Costs that spill over onto third parties who were not directly involved in a transaction (e.g. second-hand smoke, noise pollution, etc. harm third parties not directly involved in producing or consuming the good or service).

Public Goods

Goods/Services such that (1) non-payers ("free-riders") cannot be excluded from using the good/service AND (2) one person's consumption of the good does not stop another person from consuming the good/service. Private business would not have an incentive to provide these goods (at least not enough of them from society's perspective) since they can't make the "free-riders" pay. (e.g. national defense, street lighting, public parks, public fireworks displays, etc.) While the government may provide these goods/services themselves, they may also contract private companies and use tax dollars to fund provision of the good/service.

Monopoly Power

The ability of a firm to control (at least to some extent) the price they can charge for a good/service. Markets are only efficient if there is lots of competition and not this type of power.

Wealth

The value of the assets people have accumulated over time (e.g. savings accounts, investments, etc.).

Income

The money people bring in during a given period of time.

Poverty Thresholds

Determined as 3x the cost of an "economy food budget" for different family sizes and number of dependent children. If a given household's income is below these income levels for their family size and composition, the family is officially classified as being "in poverty" (poor).