Market Failures - Definitions and Examples
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TimestampType of Market FailureUnder or Over Production?ExamplesDefinitionExplanationGovernment responsesExplanation of Government ResponseNames
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11/22/2012 1:28:32Positive externalitites of productionUnder-producedOpen source softwareA positive externalities of production exists when the marginal private cost is greater than the marginal social cost. A positive externality of production results in the price being too high, resulting in the product being under-produced. There is a potential welfare gain with a positive externality of production.Open source software is an example of a positive externality of production. The production of the open source software has a high marginal private cost to the producer. The production of this software greatly benefits the society by providing software free of charge. This results in a lower marginal social cost, resulting in a positive externality of production. An example of an open source software would be Firefox. The private cost to produce Firefox is greater than the social cost, given that the public is benefited by the production.Corrective subsidyA government would impose a corrective subsidy to decrease the marginal private cost for the producer. A decrease in price for the producer would increase the quantity of the product. This subsidy woud bring the marginal private cost closer to the marginal social cost, increasing consumer and producer surplus, reducing the potential welfare gain, producing more of the beneficial good.Daniel, Douglas, Sonny
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11/22/2012 1:39:10Public GoodsNot produced at allDefense, Park benches, Road, street lights A public good is a good or service that is non-excludable by the producers and non-rivalrous in consumption. As a result, private sectors are unmotivated to produce such goods as they would not sell. Therefore, it is the government's responsibility to provide public goods. Park benches are an example of a public good because they are non-excludable and non-rivalarous. Therefore, in the free market, there are no producers providing this good, thus leaving it up to the government to use tax-payer money to supply park benches for the community. This leads the benches (which provide positive benefit to society) to be underproduced and undersupplied, thus creating market failure. Corrective tax, Corrective subsidy, Government provisionThrough the implementation of corrective taxes, the government is able to provide the public good themselves. This increases the efficiency in the market for the good, as park benches can be supplied, without reliance on the private sector who are unmotivated to provide these goods. By implementing taxes, the government is able to fund the supplying of public goods by spreading the costs of the goods over a large body of people. Natalie, Tiffany & Abby
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11/22/2012 1:46:51Positive externalities of consumptionIt's not about how much is being producedCondoms, BabiesIf a good creates external benefits for society beyond those enjoyed by the consumer of the good itself. The marginal social benefits of the product use exceed the marginal private benefits.Condoms:

Condoms is part of a market failure because it is not at the socially optimal level for now. Using condoms have many external benefits, for example, if two people have sex while using a condom, there is a reduced chances of transmitting sexually transmitted diseases amongst people, there is a lower population growth rate. However, in countries where population growth is a big problem, using condoms can have several positive externalities of consumption to the society as a whole such as higher economic growth, less chance of people getting HIV/AIDS, which makes people healthier in general.
Corrective subsidy, Positive advertising , Government provisionPositive advertising:

The positive advertisements that the government encourages is a response to the positive benefits that condoms bring to society. The condom increases marginal private benefits but the marginal social benefits increases greater than the MPB, the government responds by creating positive advertising. This encourages society to consume more condoms.
James Frankie Adrian
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11/22/2012 1:48:37Asymmetric InformationOver-producedCondoms, Alcohol, Used carsAsymmetric information is the result of one party (usually producers) having more information than the other (usually consumers) while completing a transaction in a market. Its opposite is called perfect information. The most dangerous result of asymmetric information is the result of overproduction of a good, which is a major facet of market failure.Used cars:
If a producer is trying to sell a terrible and used car to a consumer, they would lie and assure the consumer that the car is of good quality by saying that a third party has confirmed that the car is of a good quality. The consumer has information that the car is of great quality and doesn't mind purchasing it. The producer, however, knows that the 'third party' is an unreliable source that was instructed to lie and say the car was good. There is an imbalance of information: asymmetrical information. This will lead to an overconsumption of used cars that what should be consumed.
Regulation, Negative advertisingNegative Advertising: If the producer is giving misleading information that ameliorates the quality of his product, people would be more encouraged to buy it despite its terrible quality. If the government were to step in and expose the terrible quality, then people would be less tempted to buy it, reducing the overconsumption of the product.Cho Yu Suen, Natalie Leung, Janani Dhileepan
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11/22/2012 1:56:53Positive externalities of consumptionIt's not about how much is being producedCondoms, BabiesPositive externalities of consumption are if a good creates external benefits for society beyond those enjoyed by the consumer of the good itself.In developed and richer countries, the fertility rates are decreasing and are relatively low compared to developing countries. The rich members of society are not willing to give birth to children despite there being a high marginal social benefit for babies. As babies are considered to be merit goods, if the demand for babies are decreasing, then it is considered to be market failure.Corrective subsidy, Positive advertising Some governments will provide subsidies for families with children; this is called a "baby subsidy". The government believes that by making it more affordable to have children, it will encourage parents to have more children, which will increase the number of babies born.Celine, Florence, Sophia
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11/22/2012 2:02:20Asymmetric InformationOver-producedCondoms, Alcohol, Used carsAsymmetric information is when one party possess more information in a transaction than the other parties. This leads to market failure as it is assumed that consumers should possess perfect information. Allocative efficiency cannot be achieved when consumers do not possess complete or correct information acquired to make utility-maximazing decisions. Producers often possess more information than the consumer and often charges a higher price than socially efficient price where marginal benefits does not equal marginal cost.Used cars is a type of market failure because car dealers often assure consumers of the reliability by informing consumers that the cars were inspected by a third party. Consumers would expect this to be the perfect information, in reality, consumers are often blinded with false or twisted information and pay a higher amount that the car is actually worth selling at a higher price.Regulation, Negative advertisingGovernment would help improve efficiency in the market for the good by launching negative advertising and regulation, consumers would be discouraged to consume, reducing the over consumptions of the product to a closer socially efficient quantity. Regulations on the production of the goods could lower the price supplied, hence lowering the profit that producer receive from the supply of the good. This moves the consumption to a more socially efficient level where marginal cost equals marginal benefits.Janani, Choyu
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11/22/2012 6:50:41Asymmetric InformationOver-producedGift giving at Christmas, Condoms, Open source software, Used cars, Chairs, housing marketAsymmetric Information is when the producer does not disclose all relevant informations to consumer. Ergo, the seller knows more than the buyer, and can potentially take advantage of the situation (e.g. inflated prices, not disclosing defects in the product) to the harm of consumers.While condom producers may advertise their product to be 99% safe, the reality is, they may be not. Take, for example, a company that guarantees complete safety as a contraceptive, yet defects in the product result in unwanted pregnancy or sexually stimulated diseases. Hence, producers oversupply the product, keeping relevant and important information from the consumers, and consumers purchase the product under the false assumption that the condom brand is effective.RegulationLegislators can create regulations to ensure that producers provide all relevant informations to the consumer, so as to prevent asymmetrical information. To do this, they can implement enforcement tactics. (e.g. fines)

In regards to the defective condom company, the company's license can be threatened or regulations enforced to ensure that the condom's either disclose information to the consumer or ensure the product is safe for use.
Sean AU, Toby HUNG, Andrew BILDEN, Tesas KLARDIE
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11/22/2012 6:50:52Asymmetric InformationOver-producedGift giving at Christmas, Condoms, Open source software, Used cars, Chairs, housing marketAsymmetric Information is when the producer does not disclose all relevant informations to consumer. Ergo, the seller knows more than the buyer, and can potentially take advantage of the situation (e.g. inflated prices, not disclosing defects in the product) to the harm of consumers.While condom producers may advertise their product to be 99% safe, the reality is, they may be not. Take, for example, a company that guarantees complete safety as a contraceptive, yet defects in the product result in unwanted pregnancy or sexually stimulated diseases. Hence, producers oversupply the product, keeping relevant and important information from the consumers, and consumers purchase the product under the false assumption that the condom brand is effective.RegulationLegislators can create regulations to ensure that producers provide all relevant informations to the consumer, so as to prevent asymmetrical information. To do this, they can implement enforcement tactics. (e.g. fines)

In regards to the defective condom company, the company's license can be threatened or regulations enforced to ensure that the condom's either disclose information to the consumer or ensure the product is safe for use.
Sean AU, Toby HUNG, Andrew BILDEN, Tesas KLARDIE
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11/22/2012 6:51:53Public GoodsNot produced at allDefense, Park benches, Tree farmsA public good is “non-excludable” and “non-rivalrous”. Non-excludable means that one cannot prevent non-payers from enjoying benefits. Non-rivalrous means that one person’s enjoyment is not at another person’s expense.If one sits on a park bench then walks away after a while, the bench is still there for whoever comes along next to enjoy. Also, once the bench is provided, it is nearly impossible to exclude anyone from using it. These characteristics make park benches an public good, they are both non-rivalrous in consumption and non-excludable in production. Marginal social benefit is greater than marginal private benefit, and marginal social cost is lower than marginal social benefit, thus park benches are a market failure.Corrective tax, Corrective subsidyGovernments may subsidize private firms to provide the public good in order to reduce their costs of production. This will then give the firms an incentive to produce the public good. However, there is an opportunity cost to the government, and governments will then have to face the decision of how much they should pay each firm as less advantageous goods should be subsidized at a lesser extent.Fiona, Karen, Natalee
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11/22/2012 7:02:00Positive externalitites of productionUnder-producedTree farms, Open source software, Bee FarmPositive externalities of production is when the marginal social benefit of production exceeds the marginal private benefit e.g. the production of a specific product generates external benefits that may go under-valued by the market. For example, when a tree farmer plants trees, the positive externality of that production would be the oxygen that the tree produces and the carbon dioxide that it absorbs. A beekeeper keeps the bees in order to sell their honey for money. A positive externality associated with the activity is the pollination of the surrounding crops by the bees. The value gained by society due to the pollination of the surrounding crops may be more important than the value of the honey that the beekeeper is able to sell.Corrective subsidy, Vocational Training by Setting up Training Centers for WorkersNo matter who pays for or what the cost is for vocational training, economies benefit from training the labours over time. Therefore, there will be a substantial improvement in the quality of labour, a factor of production, therefore, shifts out of the PPC of an economy. Alvin, Charles, Christopher, Jeremy
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11/22/2012 7:02:03Income InequalityIt's not about how much is being producedGaps between rich and poorThe who are born rich are more likely to become rich, while individuals who are born poor are more likely to like a life of a relative poverty. In a "free" market all individuals possess an equal opportunity to succeed but due to a mis allocation of resources in a pure market economy, this might not always be the case.
In a "free" market all individuals possess an equal opportunity to succeed but due to a mis allocation of resources in a pure market economy, this might not always be the case.
Government provision, Progressive income taxBy having a progressive income tax, the rich will be taxed relatively more than the poor. This will allow some of the money to be distributed to public goods to increase the overall standard of living.Annika, Seung-Eun, Crystal, and Jessica.
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11/22/2012 7:03:07Positive externalities of consumptionUnder-producedCondoms, BabiesPositive externalities of consumption: This is when the marginal social benefits is greater than the marginal private benefits. Not enough babies being produced in rich countries, which then has the effect of there being not enough workers. This then reduces the economic growth of the country.Positive advertising , Government provisionA positive advertising will definitely leave a mark of the good in the population's mind when they watched the advertisement. Mingo, Roarke, Anthony, Gavin
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11/22/2012 7:20:35Common Access ResourcesOver-producedTree farms, Fishing, Logging in rainforestsWhen there is a common assess good, then everyone will only care about maximizing their own private benefit, and the good will be exploited very quickly.When fishermen can fish as many as they want, then they will try to fish as much as they can as to maximize their profit. The fish in the ocean will then be over-exploited.Negative advertising, Complete ban, Privatization of common resourcesBy privatizing the common resources, the common resources are no longer accessible by the public, so they cannot exploit the resources, and the resources will not be used up as soon.Apple Lee
Michelle Pang
Alice Suen
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11/22/2012 20:57:25Public GoodsOver-producedPark benches, Tree farms, FishingThere are some goods in the world today that society benefits greatly from, but would not be produced without the government. The role of a producer is to increase profits, which is difficult to do when you cannot control how exclusive the good is- which brings us to the definition of a public good. A public good is a good that is non-exclusive in consumption and non-rivalrous in production. What is an example of a public good you might ask? Every time we look outside our window we see public goods. Think of the roads you walk on, the street lamps you obtain light from, the park benches that you have wearily rested upon- all of these goods and services would not be produced if it wasn't for the government. No company can determine which people use a road, or who benefits from the light that a street lamp provides because it is non-exclusive. The market for public goods is one that solely relies on the government and therefore the tax of it's citizens. Park benches are the perfect example of a public good. They are non-rivalrous and non-exclusive. They are non-rivalrous in the sense that people are able to sit at these benches for as long as they like, and when they get up to carry on with their day, the park benches remain there for public use. They are also non-exclusive because it is nearly impossible to allow only certain people to sit on the benches. In other words, it is free to everyone's use and is enjoyed by the public when in need of a nice seat in a park. Public goods are great and have several benefits to all people.Regulation, Progressive income taxPublic goods are under-supplied so in order to improve efficiency, governments need to find something to do that will make themselves be able to further supply the public goods. This would require the government to receive more income/revenues to be able to pay to produce more of the goods. A progressive income tax would be an example of how to do this. A progressive income tax is an income tax which takes a higher percentage of the incomes of people who are richer, and takes a lower percentage of the incomes of people who are poorer. This means that the government would be able to collect more revenues because they would receive more money from those who are rich. With these extra revenues the government would be able to increase the supply of public goods which would fix, or at least help fix, the under-supply of the goods, increasing efficiency.Julia Paster, Amanda Clery, Adriana Corgat
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12/3/2012 10:10:30
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11/27/2014 11:22:13Public GoodsUnder-producedDefense, Open source softwareCorrective subsidy, Regulation, Government provision
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11/27/2014 11:24:09Positive externalitites of productionUnder-producedDefense, Condoms, Park benches, Babies, Tree farmsCorrective subsidy, Regulation, Positive advertising , Government provision
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3/18/2015 13:08:53Positive externalities of consumptionNot produced at allCondoms, BabiesPositive Externalities of Consumption: Occurs when the consumption of a good or service causes a positive benefit to consumer and to the third party as well. If a good creates external benefits for society beyond those enjoyed by the consumer of the good itself. Condoms: when an individual uses a condom when having sex, the individual enjoys private benefits, such as reducing the chance of becoming infected with a sexually transmitted disease and reducing the likelihood of an unwanted pregnancy. The benefits for society of condom use are much greater, and include lower HIV and other STD infection rates, thus a healthier, more productive population, lower birth rates thus less pressure on resources from excessive population growth. non-governmental organization, in the form of provisions or education Increase the awareness among Indian males about the purpose and appropriate use of condoms, to help reverse the population growth that threatens to put increasing pressure on the nation’s resources. Bronte Balon
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3/18/2015 13:16:58Public GoodsUnder-producedDefense, Park benches, sidewalks, street lights, public art, lighthousesA public good is one that is non-rivalrous in consumption and non-exclusive in production. Non-rivalrous meaning that one person’s enjoyment is not at another person’s expense, and non-excludable meaning that one cannot prevent non-payers from enjoying benefits. Park benches: If you sit on a park bench for ten or fifteen minutes and then get up and walk away, the bench is still there for whoever comes along next to enjoy! Once a city or state or national government has placed a bench in a park, it is nearly impossible to exclude anyone from using it...all that use it will reap its benefits. Corrective subsidy, Positive advertising , Government provisionA subsidy would help provide more public goods that will efficiently benefit society, like health and education for example.

Positive advertisement, specifically for health and education, could promote these public goods and increase their demand in society so that more people are aware of their benefits and will utilize them.
Shelby
Jenna
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3/18/2015 13:17:41Income InequalityIt's not about how much is being producedGaps between rich and poorGreater gap between the rich and the poor leads to greater wealth for the rich and decreased wealth for the poor, resources aren't distributed equally to every personRegulation, Progressive income tax, Redistribution of WealthA progressive income tax would help close the gap between the rich and the poor and allow more efficient allocation of resources by not allowing the top income earners to earn so much as to cause all others within the country to lose wealthAndrew Blakeslee and Fabio DiLollo
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3/18/2015 13:17:56Income InequalityIt's not about how much is being producedGaps between rich and poorThe unequal distribution of a Nations total output among its different income brackets.The rich get richer and the poor and middle class do not benefit equally from economic growth and in fact lose a portion of the market which they control.Regulation, Progressive income tax, redistribution of wealthGovernment will provide basic services to help low income earners such as education and healthcare which they otherwise could not afford. Government also will increase taxes on rich and redistribute that income upon the lower income partners through those services Andrew Blakeslee Fabio Di Lollo
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3/18/2015 13:20:23Asymmetric InformationIt's not about how much is being producedUsed cars, Hosing/Mortgage 2008-2009Market failure occurs when the free market produces at a greater or lesser output level than what is the equilibrium. Asymmetrical information market failure occurs when the producers give either false information or not enough information to the consumers. Used cars salespeople stereotypically provide false or not the full information to the consumer in order for them to sell the car at a higher price. Salespeople can use a mechanic who depends on them for business to provide a false report on the quality of the car. As a result, the car may be deemed more reliable and safer than it actually is, allowing the salesperson to sell the car at a higher price, earning them more money and providing extra security in the customer's head. Also, they take out insurance against the car (that may not be as safe as the mechanic says it is) this way if/when the car breaks down, the salesperson receives insurance money for it.Regulation, Government provisionThere really isn't very much that the government can do, some people are corrupt and nothing can be done about them. Government can potentially try to regulate these markets, however that is expensive with potentially little to no effect on the "sleepy car salespeople" of the world. Sabrina Toscano and Michael Wisler
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3/18/2015 13:21:02Positive externalitites of productionUnder-producedPark benches, Tree farms, Open source softwareA Positive Externality of Production occurs when there are potential gains to a third party when a certain good is produced.The production of open source softwares by companies enables random people throughout the world to enjoy the benefits of using this free software, depending on the purpose of the software distributed. Corrective subsidy, Government provisionBy subsidizing the production of open source software, producing open source software becomes more profitable, therefore increasing the amount of open source software that is readily available to the public. This increase in the quantity of open source software increases the cumulative benefits that this kind of software may provide (ex. increasing productivity)Emmanuel Scur
Arturo Annese
Ailin Li
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3/18/2015 13:21:24Public GoodsUnder-producedDefense, Park benches, sidewalks, street lights, public art, lighthousesA public good is one that is non-rivalrous in consumption and non-exclusive in production. Non-rivalrous meaning that one person’s enjoyment is not at another person’s expense, and non-excludable meaning that one cannot prevent non-payers from enjoying benefits. Park benches: If you sit on a park bench for ten or fifteen minutes and then get up and walk away, the bench is still there for whoever comes along next to enjoy! Once a city or state or national government has placed a bench in a park, it is nearly impossible to exclude anyone from using it...all that use it will reap its benefits. Corrective tax, Corrective subsidy, Regulation, Positive advertising , Government provisionA corrective subsidy would help provide more public goods that will efficiently benefit society, like health and education for example.

Positive advertisement, specifically for health and education, could promote these public goods and increase their demand in society so that more people are aware of their benefits and will utilize them.
Shelby
Jenna
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3/18/2015 13:21:33Common Access ResourcesIt's not about how much is being producedFishing, Logging in rainforestsCommon access resources are resources that are commonly used by everyone because there is no private owner. Individuals collectively exploit a particular good to the point that it creates a social cost to the third party. Fishing: Because the waters aren't owned by no particular owner companies attempt to maximize profits causing the depletion of fish to increase faster than they are reproducing. This causes market failure in the long run because it decreases biodiversity which effects other peoples livelihood. Regulation, Negative advertising, Government provision, Privatization of common resourcesRegulation: By limiting the amount one can fish this will decrease the depletion of the common resource. York Grant Mariana
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3/18/2015 13:25:00Public GoodsUnder-producedDefense, Park benches, sidewalks, public art, light houses, economic stabilityA public good is a good that is not profitable to produce, so it would not be provided to consumers if it were not for the government. It is non-rivalrous in consumption and non- exclusive in production (if one person enjoys the benefits of such a good, it does not exclude others from enjoying it as well, and once such a good is produced, the producer finds it impossible to exclude particular people from enjoying its benefits)Park Benches are a type of market failure when they are misused and the actions of one person affects another persons benefit. Corrective subsidy, Regulation, Privatization of common resourcesThe government should subsidize the provision of park benches so that they will be more accessible and more people will be able to benefit from using them. They regulate the use of park benches to prevent people from misusing the park benches. People that sleep on park benches make it difficult for everyone to benefit from them. Increased rules and security will help solve this problem.Jenna
Shelby
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3/18/2015 19:03:17Income InequalityOver-produced
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3/18/2015 19:04:49Positive externalities of consumptionIt's not about how much is being producedCondoms, BabiesA positive externality of consumption is when something that is beneficial to society is under consumed. Condoms, they are under consumed and the consumption of them would leader to a better society due to lower birth rates and less of a change of getting infection. Positive advertising Government could use a positive advertisement to help affect peoples decision making and get them to use a condom before having sex. They could show this to children in high school to kids so they learn to use condoms when they get older. Chris Bergin
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3/18/2015 19:05:36Asymmetric InformationIt's not about how much is being producedUsed carsIn this type of market failure, consumers are not fully informed about the products they are buying, so they could end up over-paying for low quality goods. This results in an overconsumption of negative products. When an individual purchases a used car, they cannot be certain if it is good quality. The salesman could persuade them to pay a price much higher than the actual worth of the car, and then make sure that this was non-refundable if the car breaks down. This results in an overallocation of resources that people may not have purchased in the first placed had they been fully informed. Regulation, Government provisionThe government should set more regulations on the inspection of used cars, and ensure that the inspectors are not affiliated with that dealership, and do not depend upon posting good reviews to keep their business. Jasmin
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3/18/2015 19:13:08Public GoodsUnder-producedDefense, Park benchesPublic goods create a positive externality of production, because the resources that can be used to create these goods are being misallocated in the production of other goods. The third party benefits from these goods because they are both non-rivalrous and non-excludable. However, they will be under produced because of the growing population and the desire to have limited government intervention. Defense. It is provided by the government and enjoyed by all the people living in that country. Regulation, Government provisionA government provision can increase the production of these goods. Jay
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3/19/2015 16:52:34Positive externalitites of productionUnder-producedCondomsNegative externality of production – making of a product creates spillover benefits to others.Protects people from getting disease and unwanted pregnancy.Corrective subsidy, Positive advertising Advertisement and subsidies. Will help to improve and increase the usage of a good. However, it won't totally helpGeorgiy
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10/6/2015 23:12:40Public Goods
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12/2/2016 19:30:28Income InequalityNot produced at allGaps between rich and poorProgressive income tax
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12/22/2016 2:26:41
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3/16/2017 4:11:44Public GoodsOver-producedDefense, Logging in rainforestsHJYYUYCorrective taxYUYYUY
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3/22/2017 21:15:11
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9/13/2017 14:23:21Asymmetric InformationIt's not about how much is being producedstandardized productsRegulation
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11/6/2017 5:16:10Positive externalities of consumptionIt's not about how much is being producedDefense, Alcohol, Gaps between rich and poorIt is good and it has positive side-effectsAlcohol has positive and negative effects on the primary party, it also has positive externalities on the third party.Regulation, Positive advertising They're trying to ban the public urination.Louis Chester
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11/6/2017 5:18:29Positive externalitites of productionIt's not about how much is being producedsugar taxationThe sugar taxation in Jamie Olivers Restaurant, reduces the quantity demanded of this demerit good and the profit goes to the education of children about this demerit good.The sugar taxation reduces the quantity demanded of this demerit good, in Jamie Olivers Restaurant. Corrective tax, Regulation, Government provisionIf the government were to support the tax that Jamie Oliver started in his restaurant, than the whole thing would have a bigger, more positive effect.Stella, Nina, Carlota
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11/6/2017 5:24:06
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11/8/2017 7:19:30Asymmetric InformationOver-producedAlcoholOverconsumption of demerit good. A demerit good is a good or service whose consumption is considered unhealthy, in this case, it is soft drink. Usually consumption of demerit goods are high and stable because people have addiction to them. Government increase the price of alcohol and therefore should decrease the quantity demanded, however, alcohol tends to be price inelastic because people are addicted to it. So, the increase in price may have little impact on consumption. RegulationThe governments banned children under 16 are not allowed to drink soft drinks.Coco
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11/8/2017 7:20:13Public GoodsOver-producedfitnessFitness is a necessary part in our life, we could have more chance to get some heart disease if we don't exercise frequentlyPositive advertising Lower the price and make more attractive goods and services.Iris, Holger, Sam
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11/8/2017 7:24:04It's not about how much is being producedAlcoholnegative externalities of consumption, people buy too much of the goodstoo many people buy alcohol which leads to a lot of people becoming drunk and now they're misbehaving.Regulation, Government provision, Complete banThe government uses pee repelling paint which reflects the pee on the offender which deters them from peeing on the walls.Orkax, Kevin, Seth(its not my fault.)
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