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Marketfail

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  • 1. Market Failures and Government Policy
  • 2. Market Failures: Externalities and Public Goods
    Society's microeconomic objectives
    equity
    social efficiency
    marginal social benefits and costs
    production where MSB = MSC
  • 3. Market Failures: Externalities and Public Goods
    Externalities
    External costs of production
    MSC > MC
  • 4. External costs in production
    MC = S
    D
    P
    Q1
    Costs and benefits
    O
    Quantity
  • 5. External costs in production
    External cost
    Q2
    Social optimum
    MSC
    MC = S
    Costs and benefits
    D
    P
    O
    Q1
    Quantity
  • 6. Externalities
    External costs of production
    MSC > MC
    External benefits of production
    MSC < MC
    Market Failures: Externalities and Public Goods
  • 7. External benefits in production
    MC = S
    Costs and benefits
    D
    P
    O
    Q1
    Quantity
  • 8. External benefits in production
    External benefit
    Q2
    Q1
    Social optimum
    MC = S
    MSC
    Costs and benefits
    D
    P
    O
    Quantity
  • 9. External benefit
    External cost
    External costs and benefits in production
    MSC
    MC = S
    MSC
    MC = S
    Costs and benefits (£)
    Costs and benefits (£)
    D
    P
    D
    P
    O
    O
    Q
    Q
    Q
    Q
    2
    2
    1
    1
    Quantity
    Quantity
    (b) External benefits
    (a ) External costs
  • 10. Externalities
    External costs of production
    MSC > MC
    External benefits of production
    MSC < MC
    External costs of consumption
    Market Failures: Externalities and Public Goods
  • 11. Externalities
    External costs of production
    MSC > MC
    External benefits of production
    MSC < MC
    External costs of consumption
    MSB < MB
    Market Failures: Externalities and Public Goods
  • 12. External costs in consumption
    (MB)
    MU = D
    Q1
    Costs and benefits
    D
    P
    O
    Quantity
  • 13. External costs in consumption
    External cost
    (MB)
    MU = D
    Q2
    Social optimum
    Costs and benefits
    D
    P
    MSB
    O
    Q1
    Quantity
  • 14. Externalities
    External costs of production
    MSC > MC
    External benefits of production
    MSC < MC
    External costs of consumption
    MSB < MB
    External benefits of consumption
    Market Failures: Externalities and Public Goods
  • 15. Externalities
    External costs of production
    MSC > MC
    External benefits of production
    MSC < MC
    External costs of consumption
    MSB < MB
    External benefits of consumption
    MSB > MB
    Market Failures: Externalities and Public Goods
  • 16. External benefits in consumption
    (MB)
    MU = D
    Costs and benefits
    D
    P
    O
    Q1
    Quantity
  • 17. External benefits in consumption
    External benefit
    (MB)
    MU = D
    Q2
    Social optimum
    Costs and benefits
    D
    P
    MSB
    O
    Q1
    Quantity
  • 18. External benefit
    External cost
    Q
    Q
    Q
    Q
    2
    2
    1
    1
    External costs and benefits in consumption
    Costs and benefits (£)
    Costs and benefits (£)
    P
    P
    P
    P
    MSB
    MB
    MB
    MSB
    O
    O
    Rail miles
    Car miles
    (b) External benefits
    (a ) External costs
  • 19. Externalities
    External costs of production
    MSC > MC
    External benefits of production
    MSC < MC
    External costs of consumption
    MSB < MB
    External benefits of consumption
    MSB > MB
    Public goods
    Market Failures: Externalities and Public Goods
  • 20. Externalities
    External costs of production
    MSC > MC
    External benefits of production
    MSC < MC
    External costs of consumption
    MSB < MB
    External benefits of consumption
    MSB > MB
    Public goods
    non rivalry
    Market Failures: Externalities and Public Goods
  • 21. Externalities
    External costs of production
    MSC > MC
    External benefits of production
    MSC < MC
    External costs of consumption
    MSB < MB
    External benefits of consumption
    MSB > MB
    Public goods
    non rivalry
    non-excludability
    Market Failures: Externalities and Public Goods
  • 22. Market Failures: Monopoly Power
    The demand curve under monopoly
    production at less than the social optimum
  • 23. A monopolist producing less than the social optimum
    MC
    P1
    MC1
    AR
    MR
    Q1
    Monopoly output
    £
    O
    Q
  • 24. A monopolist producing less than the social optimum
    Perfectly competitive output
    Monopoly output
    £
    MC = MSC
    P1
    P2= MSB
    = MSC
    MC1
    AR = MSB
    MR
    O
    Q
    Q2
    Q1
  • 25. Market Failures: Monopoly Power
    The demand curve under monopoly
    production at less than the social optimum
    Deadweight loss under monopoly
    consumer and producer surplus
    consumer surplus
  • 26. The demand curve under monopoly
    production at less than the social optimum
    Deadweight loss under monopoly
    consumer and producer surplus
    consumer surplus
    producer surplus
    Market Failures: Monopoly Power
  • 27. The demand curve under monopoly
    production at less than the social optimum
    Deadweight loss under monopoly
    consumer and producer surplus
    consumer surplus
    producer surplus
    total surplus
    Market Failures: Monopoly Power
  • 28. Deadweight loss under monopoly
    a
    Ppc
    Qpc
    MC
    (= S under perfect competition)
    £
    Consumer
    surplus
    Producer
    surplus
    AR = D
    O
    Q
    (a) Industry equilibrium under perfect competition
  • 29. The demand curve under monopoly
    production at less than the social optimum
    Deadweight loss under monopoly
    consumer and producer surplus
    consumer surplus
    producer surplus
    total surplus
    the effect of monopoly on total surplus
    Market Failures: Monopoly Power
  • 30. Deadweight loss under monopoly
    Deadweight
    welfare loss
    b
    Pm
    MR
    Qpc
    MC
    (= S under perfect competition)
    £
    Consumer
    surplus
    a
    Ppc
    Producer
    surplus
    AR = D
    O
    Qpc
    Q
    (b) Industry equilibrium under monopoly
  • 31. Deadweight loss under monopoly
    Perfect
    competition
    a
    Ppc
    Qpc
    MC
    (= S under perfect competition)
    £
    Consumer
    surplus
    Producer
    surplus
    AR = D
    O
    Q
    (a) Industry equilibrium under perfect competition
  • 32. Deadweight loss under monopoly
    Monopoly
    Deadweight
    welfare loss
    b
    Pm
    MR
    Qpc
    MC
    (= S under perfect competition)
    £
    Consumer
    surplus
    a
    Ppc
    Producer
    surplus
    AR = D
    O
    Qpc
    Q
    (b) Industry equilibrium under monopoly
  • 33. The demand curve under monopoly
    production at less than the social optimum
    Deadweight loss under monopoly
    consumer and producer surplus
    consumer surplus
    producer surplus
    total surplus
    the effect of monopoly on total surplus
    Other problems with monopoly
    Market Failures: Monopoly Power
  • 34. The demand curve under monopoly
    production at less than the social optimum
    Deadweight loss under monopoly
    consumer and producer surplus
    consumer surplus
    producer surplus
    total surplus
    the effect of monopoly on total surplus
    Other problems with monopoly
    Possible advantages from monopoly
    Market Failures: Monopoly Power
  • 35. Other Market Failures
    Ignorance and uncertainty
    Immobility of factors and time lags
    Protecting people's interests
    dependants
    the principal–agent problem
    the problem of asymmetric information
    the need for monitoring
    poor economic decision making by people
    merit goods
    Macroeconomic goals
    Economists and policy advice
  • 36. Government Intervention: Taxes and Subsidies
    The use of taxes and subsidies to correct externalities
    the optimum size of a tax
  • 37. Using taxes to correct a market distortion
    MC = S
    D
    P
    Q1
    Costs and benefits
    O
    Quantity
  • 38. Using taxes to correct a market distortion
    External cost
    Q2
    Social optimum
    MSC
    MC = S
    Costs and benefits
    D
    P
    O
    Q1
    Quantity
  • 39. Using taxes to correct a market distortion
    Optimum tax = MSC–MC
    MC
    Q2
    MSC
    MC = S
    Costs and benefits
    P
    D
    O
    Q1
    Quantity
  • 40. The use of taxes and subsidies to correct externalities
    the optimum size of a tax
    the optimum size of a subsidy
    Government Intervention: Taxes and Subsidies
  • 41. Using subsidies to correct a market distortion
    MC = S
    Costs and benefits
    D
    P
    O
    Q1
    Quantity
  • 42. Using subsidies to correct a market distortion
    External benefit
    Q2
    Q1
    Social optimum
    MC = S
    MSC
    Costs and benefits
    D
    P
    O
    Quantity
  • 43. Using subsidies to correct a market distortion
    MC
    Optimum subsidy
    = MC – MSC
    MC = S
    MSC
    Costs and benefits
    P
    D
    O
    Q2
    Q1
    Quantity
  • 44. The use of taxes and subsidies to correct for monopoly
    use of lump-sum taxes
    Advantages of taxes and subsidies
    Disadvantages of taxes and subsidies
    infeasible to use different tax and subsidy rates
    lack of knowledge
    Government Intervention: Taxes and Subsidies
  • 45. Government Intervention: Laws and Regulation
    The use of laws and regulation
    Advantages of legal restrictions
    simple to understand
    safer when size of problem is potentially great
    quick to implement
    a good way of dealing with imperfect information
    Disadvantages of legal restrictions
    a 'blunt weapon'
  • 46. Types of regulation
    The system of regulation in the UK
    UK regulatory bodies
    price-cap regulation
    the RPI–X formula
    Advantages of the UK system
    discretionary
    flexible
    incentive for firms to reduce costs
    Disadvantages of the UK system
    Government Intervention: Laws and Regulation
  • 47. Other Forms of Government Intervention
    Changes in property rights
    the problem of limited property rights
    extending property rights
    limitations of this solution
    impractical in many situations
    problems of litigation
    questions of equity
    Provision of information
    consumer information
    information on jobs
    information to firms
  • 48. Other Forms of Government Intervention
    Direct provision of goods and services
    the provision of public goods
    the need to evaluate costs and benefits of publicly provided goods
    the provision of other goods and services by the government
    social justice
    large positive externalities
    dependants
    ignorance
  • 49. More or Less Intervention?
    Drawbacks of government intervention
    shortages and surpluses
    poor information
    bureaucracy and inefficiency
    lack of market incentives
    shifts in government policy
    lack of freedom for the individual
  • 50. More or Less Intervention?
    Advantages of the free market
    automatic adjustments
    dynamic advantages of capitalism
    possibly high degree of competition even under monopoly/oligopoly
    Judging the arguments
    Should there be more or less intervention in the market?
    important to consider both costs and benefits of intervention
    moral issues
    problem of predicting effects of intervention
  • 51. The Environment: a Case Study
    The environmental problem
    global and local environmental problems
    causes of the problems
    Market failures
    environment as a common resource
    externalities
    ignorance
    inter-generational problems
  • 52. The Environment: a Case Study
    Policy alternatives
    charging for use of the environment
    emissions charges
  • 53. An emissions charge
    MSC
    P2
    MB = MSB
    L2
    Costs and benefits (£)
    P1 = 0
    L1
    Level of emission
  • 54. The Environment: a Case Study
    Policy alternatives
    charging for use of the environment
    emissions charges
    user charges
  • 55. The Environment: a Case Study
    Policy alternatives
    charging for use of the environment
    emissions charges
    user charges
    optimum charge = external cost
  • 56. The Environment: a Case Study
    Policy alternatives
    charging for use of the environment
    emissions charges
    user charges
    optimum charge = external cost
    green taxes and subsidies
  • 57. The Environment: a Case Study
    Policy alternatives
    charging for use of the environment
    emissions charges
    user charges
    optimum charge = external cost
    green taxes and subsidies
    use of such taxes around the world
  • 58. Green tax revenues as a % of GDP
  • 59. Green tax revenues as a % of GDP
  • 60. The Environment: a Case Study
    Policy alternatives
    charging for use of the environment
    emissions charges
    user charges
    optimum charge = external cost
    green taxes and subsidies
    use of such taxes around the world
    laws and regulations
  • 61. The Environment: a Case Study
    Policy alternatives
    charging for use of the environment
    emissions charges
    user charges
    optimum charge = external cost
    green taxes and subsidies
    use of such taxes around the world
    laws and regulations
    advantages and disadvantages
  • 62. The Environment: a Case Study
    Policy alternatives
    charging for use of the environment
    emissions charges
    user charges
    optimum charge = external cost
    green taxes and subsidies
    use of such taxes around the world
    laws and regulations
    advantages and disadvantages
    education
  • 63. The Environment: a Case Study
    Policy alternatives
    charging for use of the environment
    emissions charges
    user charges
    optimum charge = external cost
    green taxes and subsidies
    use of such taxes around the world
    laws and regulations
    advantages and disadvantages
    education
    tradable permits
  • 64. The Environment: a Case Study
    Policy alternatives
    charging for use of the environment
    emissions charges
    user charges
    optimum charge = external cost
    green taxes and subsidies
    use of such taxes around the world
    laws and regulations
    advantages and disadvantages
    education
    tradable permits
    advantages and disadvantages
  • 65. The Environment: a Case Study
    How much can we rely on governments?
    governments must have the will to protect the environment
    depends on attitudes of various interest groups
    must be able to identify problems and appropriates solutions
    when problems are global:
    may require international agreements
    governments are likely to be more concerned with their own national interests

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