Marketfail

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Marketfail

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

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