Part C | Markets fail with externalities.
In Part A we set up the landscape of what's possible. But we left with the question where on the PPF is best. In Part B we introduced markets as a way to arbitrate which point on the PPF we should choose. And we showed that competitive markets without externalities deliver a quantity that maximizes Total Surplus.
But not every market is competitive or without externalities. In Part C we introduce the concept of Market Failure, when markets deliver a quantity that society does not want. We then introduce a government policy to correct this failure. This is a first introduction externalities and corrective taxes, our first setting where markets fail.
Episodes
Take a look at a few animated videos I put together for my students during the early days of COVID. The labeling is different than we're using this semester but the content is identical.
Episode C1:
International Trade and Tariffs
Episode C2:
Taxes and Welfare
Episode C3:
Externalities
Episode C4:
Corrective Taxes
Reading
Start Part C by skimming the reading to understand the main ideas. Then do the practice material, using the text for help when needed to stay focused and get unstuck quickly.
Chapter 5: Elasticity ( File | AI Podcast Summary )
Chapter 8: Taxes and markets ( File | AI Podcast Summary )
Chapter 10: Externalities ( File | AI Podcast Summary )
This chapter discusses externalities, their impact on market outcomes, and potential policy solutions.
Vignettes
Homework
MiniExam and Demo
MiniExam C will be held on Monday October 21st and covers everything in Part C. You will begin to learn that if you understand the concepts and do the work in the Vignettes, Homework, and Demo, you're going to be in good shape on the MiniExam.
Demos are a resource for you to use as you'd like. But my advice is to start by trying to solve it on your own and only then use the video and solutions to check your work. You're more than welcome to watch this video first, but you're not going to catch your weak points as easily, which is the main point.