Market failure and the role of government

This course is a part of AP®︎ Microeconomics, a 11-course Topic series from Khan Academy.

In this unit, we start exploring the arguments for and against government intervention in an otherwise competitive market. We examine the conditions for allocative efficiency, using the marginal social benefit and marginal social cost principle, and the ways in which externalities, public goods, and the market distribution of income create market failures even in competitive free-market economies. In addition, we study the effectiveness of government policies such as subsidies, taxes, quantity controls, and public provision of goods and services, which are designed to correct market failures and achieve allocative efficiency.

This course contains 5 segments:

Socially efficient and inefficient market outcomes

In this lesson we begin to explore what happens when some of our assumptions about markets don't quite hold.

Externalities

In our initial analysis of markets we assumed that a supply curve captured all of the costs of production and the demand curve captured all of the benefits of consumption. But what if they don't? In this lesson we explore the concept of an externality: when costs or benefits impact someone outside of a market.

Public and private goods

Economists sometimes think about goods and services in terms of two defining characteristics: excludability and rivalry. In this lesson, we explore how these characteristics lead to four types of goods: private goods, public goods, natural monopolies, and artificially scarce goods (sometimes called "club goods"), and how markets are good at allocating some of these, but not great at allocating others.

The effects of government intervention in different market structures

In a previous lesson we saw that some forms of government intervention, such as price controls and taxes, reduced surplus and caused iniefficiencies. However, we assumed that such markets were perfectly competitive, and now we know that there are lot of other kinds of markets and considerations! In this lesson, we explore how government intervention might have different effects based on the presence of externalities or the market structure.

Inequality

Income inequality is when income in inequitably distributed. In this lesson, we explore how income inequality is measured.