On September 15, 2004, the Dow Jones Industrial Index suffered its largest fall in a month, dropping by 0.8% or 86.8 points. The Standard & Poor’s 100, 400, and 500 indices also dropped by similar amounts.
According to media reports, the market declines were triggered by The Coca-Cola Company and Xilinx Inc. (a large producer of computer logic chips and related products). These companies announced that sales and profits for the third quarter 2004 would be less than analysts’ estimates.
a. Why did the whole market decline?
b. What market failure does this episode illustrate? Use the concept of externalities to explain why this is a failure.