This chapter discusses market failures including public goods, externalities, and information problems. It explains how perfectly competitive markets can result in inefficient outcomes in these situations. The chapter then analyzes various government policies for addressing market failures, such as taxes, subsidies, and direct provision of goods. Government intervention aims to maximize total surplus by correcting under- or over-allocation of resources relative to the efficient market outcome.
The document discusses externalities and the role of government in addressing market failures caused by externalities. It defines externalities as costs or benefits imposed on third parties by production or consumption activities. When externalities are present, markets allocate resources inefficiently. The government can intervene to correct market failures through Pigouvian taxes to internalize negative externalities or subsidies to encourage positive externalities. By internalizing external costs and benefits, the government can make prices reflect true social costs and benefits, leading to more economically efficient outcomes.
This document discusses various types of market failures including externalities, public goods, and imperfect information. It provides examples of negative and positive externalities and how they can lead to inefficient market outcomes. Methods for dealing with externalities include direct regulation, tax incentives, and market incentives. Public goods are nonexclusive and nonrival, but their value is difficult to determine via markets due to free rider problems. Imperfect information between buyers and sellers can also cause market failures. While government intervention may aim to correct market failures, governments can also fail due to issues like lack of proper incentives, information, and flexibility.
Meeting 4 - Stolper - Samuelson theorem (International Economics)Albina Gaisina
The document discusses the Stolper-Samuelson theorem, which states that a decrease in the price of a good will lead to a decrease in the return to the factor that is used intensively in the production of that good. It will conversely lead to an increase in the return to the other factor. The theorem is based on assumptions of perfect competition and factor mobility. It predicts that increased trade with developing countries likely contributed to rising wage inequality in skilled countries. While trade increases overall welfare, it benefits some factors more than others according to their intensity of use.
Public goods are characterized by non-excludability, meaning it is impossible to prevent people who have not paid from consuming them, and non-rivalry, meaning that one person's consumption does not reduce availability to others. Examples include national defense, street lighting, flood defenses. Public goods cause market failure as it is difficult to charge people for their provision or exclude non-payers. While governments often provide public goods, technological advances are blurring the distinction between public and private goods in some cases.
1. Market failure occurs when the conditions for perfect competition are not met, resulting in inefficient resource allocation. Some causes of market failure include monopoly, externalities, public goods, imperfect information, and non-existent markets.
2. Externalities occur when the actions of one economic unit unintentionally impact another in an uncompensated way, such as pollution from factories. This leads to a divergence between private and social costs/benefits.
3. For goods with public goods characteristics of non-rivalry and non-excludability, like national defense, there is no market mechanism to efficiently allocate resources, as they cannot be priced. This results in underprovision of public goods.
1) Demand refers to the quantity of a good or service consumers are willing and able to purchase at different price levels over a specific time period.
2) The law of demand states that as price increases, quantity demanded decreases, and vice versa, holding all other factors constant.
3) Exceptions to the law of demand include Giffen goods, Veblen goods, speculative demand, and highly essential goods where demand may increase with price increases under certain conditions.
DEMAND AND SUPPLY THEORY AND MARKET EQUILIBRIUMRebekahSamuel2
1. The document discusses demand and supply theory and market equilibrium. It covers topics like the demand curve, shifts in the demand curve, the supply curve, and shifts in the supply curve.
2. Key factors that can shift the demand curve are income, tastes and preferences, the prices of related goods, expectations about future prices and income, and the number of buyers in the market. The supply curve can shift due to changes in production costs, input prices, and technology.
3. When demand and supply interact in a competitive market, they determine an equilibrium price and quantity where the amount buyers want to purchase equals the amount sellers want to sell.
Public goods are characterized by non-excludability and non-rivalry. They cause market failure because the private sector cannot exclude non-payers or protect property rights. Examples include national defense, flood control, and street lighting. Quasi-public goods share some characteristics but can be made semi-excludable or semi-rival through congestion. While the private sector does not normally provide pure public goods, governments must determine optimal provision levels, though new technologies are blurring distinctions with private goods.
The document discusses externalities and the role of government in addressing market failures caused by externalities. It defines externalities as costs or benefits imposed on third parties by production or consumption activities. When externalities are present, markets allocate resources inefficiently. The government can intervene to correct market failures through Pigouvian taxes to internalize negative externalities or subsidies to encourage positive externalities. By internalizing external costs and benefits, the government can make prices reflect true social costs and benefits, leading to more economically efficient outcomes.
This document discusses various types of market failures including externalities, public goods, and imperfect information. It provides examples of negative and positive externalities and how they can lead to inefficient market outcomes. Methods for dealing with externalities include direct regulation, tax incentives, and market incentives. Public goods are nonexclusive and nonrival, but their value is difficult to determine via markets due to free rider problems. Imperfect information between buyers and sellers can also cause market failures. While government intervention may aim to correct market failures, governments can also fail due to issues like lack of proper incentives, information, and flexibility.
Meeting 4 - Stolper - Samuelson theorem (International Economics)Albina Gaisina
The document discusses the Stolper-Samuelson theorem, which states that a decrease in the price of a good will lead to a decrease in the return to the factor that is used intensively in the production of that good. It will conversely lead to an increase in the return to the other factor. The theorem is based on assumptions of perfect competition and factor mobility. It predicts that increased trade with developing countries likely contributed to rising wage inequality in skilled countries. While trade increases overall welfare, it benefits some factors more than others according to their intensity of use.
Public goods are characterized by non-excludability, meaning it is impossible to prevent people who have not paid from consuming them, and non-rivalry, meaning that one person's consumption does not reduce availability to others. Examples include national defense, street lighting, flood defenses. Public goods cause market failure as it is difficult to charge people for their provision or exclude non-payers. While governments often provide public goods, technological advances are blurring the distinction between public and private goods in some cases.
1. Market failure occurs when the conditions for perfect competition are not met, resulting in inefficient resource allocation. Some causes of market failure include monopoly, externalities, public goods, imperfect information, and non-existent markets.
2. Externalities occur when the actions of one economic unit unintentionally impact another in an uncompensated way, such as pollution from factories. This leads to a divergence between private and social costs/benefits.
3. For goods with public goods characteristics of non-rivalry and non-excludability, like national defense, there is no market mechanism to efficiently allocate resources, as they cannot be priced. This results in underprovision of public goods.
1) Demand refers to the quantity of a good or service consumers are willing and able to purchase at different price levels over a specific time period.
2) The law of demand states that as price increases, quantity demanded decreases, and vice versa, holding all other factors constant.
3) Exceptions to the law of demand include Giffen goods, Veblen goods, speculative demand, and highly essential goods where demand may increase with price increases under certain conditions.
DEMAND AND SUPPLY THEORY AND MARKET EQUILIBRIUMRebekahSamuel2
1. The document discusses demand and supply theory and market equilibrium. It covers topics like the demand curve, shifts in the demand curve, the supply curve, and shifts in the supply curve.
2. Key factors that can shift the demand curve are income, tastes and preferences, the prices of related goods, expectations about future prices and income, and the number of buyers in the market. The supply curve can shift due to changes in production costs, input prices, and technology.
3. When demand and supply interact in a competitive market, they determine an equilibrium price and quantity where the amount buyers want to purchase equals the amount sellers want to sell.
Public goods are characterized by non-excludability and non-rivalry. They cause market failure because the private sector cannot exclude non-payers or protect property rights. Examples include national defense, flood control, and street lighting. Quasi-public goods share some characteristics but can be made semi-excludable or semi-rival through congestion. While the private sector does not normally provide pure public goods, governments must determine optimal provision levels, though new technologies are blurring distinctions with private goods.
Since pollution is an externality firms will not undertake to control their pollution. The answer is in government regulations. Coase argues that in perfect competition with laissez faire, govt regulation is not needed. Instead bargaining between the polluters and their victims can lead to an optimal situation. But this pre supposes equality in bargaining, and does not take note of ecological consequences of pollution.
Price elasticity of supply measures how much the quantity supplied of a good responds to changes in its price. Supply is more elastic when producers can easily increase output by utilizing spare capacity, high stock levels, short production times, or flexible reallocation of resources. Supply is inelastic when producers face constraints increasing output in response to higher prices. The elasticity of supply determines whether a change in demand results in a large or small change in price.
Supply-side policies aim to improve the productive potential of an economy through various market-led and state intervention approaches. Market-led policies focus on making markets more competitive through deregulation and tax cuts, while state intervention aims to overcome market failures. The objectives of supply-side policies include improving skills, productivity, investment, and competitiveness. Successful supply-side policies could achieve sustained low inflation growth and reduce unemployment. However, the effects of supply-side policies can take a long time to materialize and not all policies effectively pick winners. Evaluating their impact also requires considering demand-side conditions and issues like inequality and sustainability.
A market can be defined as a group of firms willing and able to sell a similar product or service to the same potential buyers.
Imperfect competition covers all situations where there is neither pure competition nor pure monopoly.
Perfect competition and pure monopoly are very unlikely to be found in the real world.
In the real world, it is the imperfect competition lying between perfect competition and pure monopoly.
The fundamental distinguishing characteristic of imperfect competition is that average revenue curve slopes downwards throughout its length, but it slopes downwards at different rates in different categories of imperfect competition.
Monopoly refers to the market situation where there is a
Single seller selling a product which has no close substitutes.
Monopolies are characterized by a lack of economic competition to produce the good or service, a lack of viable substitute goods, and the existence of a high monopoly price well above the firm's marginal cost that leads to a high monopoly profit
The word “oligopoly” comes from the Greek “oligos” meaning "little or small” and “polein” meaning “to sell.” When “oligos” is used in the plural, it means “few” ,few firms or few sellers.
DEFINATION:
Oligopoly is that form of market where there are few firms and there is natural interdependence among the firms regarding price and output policy.
This document defines and provides examples of consumer surplus and producer surplus. Consumer surplus is the difference between what consumers are willing to pay for a good and what they actually pay, represented by the area under the demand curve. Producer surplus is the difference between the price producers are willing to supply a good for and the actual market price, shown as the area above the supply curve. The levels of consumer and producer surplus change with market price fluctuations. At equilibrium, consumer surplus is the area under the demand curve above the market price, while producer surplus is the area above the supply curve below the market price.
Pigouvian taxes are taxes imposed to reduce negative externalities. They work by taxing activities based on consumption levels, so that those who consume more pay more in tax. This encourages reduced consumption of the taxed product or activity. The document discusses how Pigouvian taxes have been implemented in New Zealand on cigarettes, alcohol, fossil fuels and carbon emissions. It notes the taxes can help reduce negative externalities while funding benefits for the community and environment. However, it also acknowledges disadvantages like increased business costs and the inability to completely stop consumption of taxed products.
The document discusses the demand for labor from the perspective of individual firms and the overall labor market. It explains that in the short-run, a firm's demand for labor (its marginal revenue product curve) depends on the marginal product of labor. In the long-run, when both capital and labor are variable, firms will substitute between the two inputs in response to wage changes. The market demand for labor is less elastic than the sum of individual firm demands, due to product price effects. The elasticity of labor demand depends on factors like the elasticity of product demand and the share of labor costs in total costs.
This document discusses measuring poverty and inequality. It outlines four criteria for measuring inequality: anonymity, population, relative income, and Dalton principles. It also describes the Lorenz curve and five measures of inequality: range, Kuznets ratio, mean absolute deviation, coefficient of variation, and Gini coefficient. For poverty measurement, it defines the poverty line and discusses headcount ratio, poverty gap ratio, income gap ratio, and Foster-Greer-Thorbecke class measures.
This document discusses models of duopoly, where there are two firms in an industry. It describes Cournot's model of duopoly, where each firm assumes the other will not change output and they reach an equilibrium with each supplying 1/3 of the market. It also covers Chamberlin's model, where firms recognize their interdependence and independently set the monopoly price to maximize joint profits. Finally, it mentions Bertrand's model which differs from Cournot's in its behavioral assumptions about how firms respond to each other.
Individual supply is the supply of an individual producer at each price. Market supply is the sum of the individual supply schedules of all producers in the industry
Open-Economy Macroeconomics: Basic ConceptsChris Thomas
This document provides an overview of key concepts in open-economy macroeconomics. It defines open and closed economies, and describes how an open economy interacts through international trade and financial flows. It explains exports, imports, the trade balance, and factors that influence them. It also discusses net capital flows, interest rates, and the relationship between saving, investment, and international flows. Finally, it introduces nominal and real exchange rates, and the theory of purchasing power parity.
AS How markets and prices allocate resourcesOliver Pratten
This document discusses how markets allocate resources through the interaction of economic agents and prices. It identifies the three main economic agents as consumers, producers, and owners of factors of production. Consumers aim to consume as much as possible for the lowest cost, producers aim to maximize profits, and owners of factors aim to sell their resources to the highest bidder. Adam Smith argued that if each agent acts in their own self-interest, the invisible hand of the market will ensure resources are allocated to producing goods and services that are most valued. Prices ration scarce resources, provide incentives to producers, and signal information to all agents.
1) Collusion between businesses aims to maximize joint profits by restricting output and fixing higher prices. This lowers costs from competition but reduces uncertainty.
2) When there are a few dominant firms in an oligopoly, they can engage in restrictive practices like price fixing through cooperation. This allows them to set prices above costs for higher profits.
3) Price fixing cartels are more likely to form when industries have weak regulation, communication between firms is good, and products are standardized, making coordination easier. However, cartels are unstable due to incentives for some firms to cheat and overproduce.
The document discusses four key functions of public finance: allocation, distribution, stabilization, and growth. It also discusses principles for evaluating a good tax system, including revenue adequacy, stability, simplicity, tax neutrality, economic efficiency, and low administration and compliance costs. The document compares tax systems before and after reforms, noting the need to tailor reforms to a country's existing economic system and administrative capabilities.
This document discusses public goods and market failure. It defines public goods as non-excludable and non-rival, meaning that individuals cannot be excluded from use and one individual's use does not reduce availability to others. It provides examples such as national defense. The document notes that public goods cause market failure due to missing markets and underprovision by the private sector. It also discusses quasi-public goods and how technology has blurred the distinction between public and private goods in some cases.
Consumer Behavior: Income and Substitution Effects
The Consumer’s Reaction to a Change in Income
Engel Curve or Engel’s Law
The Consumer’s Reaction to a Change in Price
The Consumer’s Demand Function
Cobb-Douglas Utility Function
The Slutsky Substitution Effect
The Hicks substitution effect
The document discusses the key aspects of pure monopoly, including:
1) Pure monopolies have a single seller, no close substitutes for their unique product, and strong barriers to entry that prevent competition.
2) Monopolists are price makers that can control price without competition.
3) Monopolies can arise from economies of scale, legal barriers like patents, or control of essential resources.
4) A profit-maximizing monopolist will produce less output and charge a higher price than would be socially optimal, resulting in deadweight loss.
This document discusses the economic concepts of supply and demand. It defines key terms like markets, demand curves, determinants of demand and supply, and equilibrium. It explains how supply and demand interact through examples of how changes in demand or supply can shift the curves and impact equilibrium price and quantity. For example, an increase in demand from hot weather leads to a higher equilibrium price and quantity sold of ice cream.
This document discusses elasticity and its application to analyzing supply and demand. It defines price elasticity of demand as the percentage change in quantity demanded given a percentage change in price. Price elasticity is computed by taking the percentage change in quantity divided by the percentage change in price. Demand can be inelastic, elastic, perfectly inelastic, or perfectly elastic depending on whether the percentage change in quantity is less than, greater than, equal to zero, or infinite compared to the percentage change in price. Income elasticity and cross price elasticity are also discussed.
This document summarizes key concepts related to market failures caused by externalities and asymmetric information. It discusses how efficiently functioning markets allocate resources, the concepts of consumer and producer surplus, and how externalities can lead to overproduction or underproduction. Government interventions like taxes, subsidies and direct controls are described as ways to correct for externalities. The document also introduces the concept of asymmetric information and how it can lead to market failures.
Market failure occurs when the free market does not allocate resources efficiently. There are several types of market failures: externalities, where external costs and benefits are not reflected in prices; public goods, which are non-excludable and non-rivalrous and therefore underprovided by the market; imperfect information, where asymmetric information between buyers and sellers can lead to problems like adverse selection and moral hazard; and monopoly power, where a lack of competition results in a deadweight loss. These situations result in resources being over-allocated or under-allocated from a societal perspective.
Since pollution is an externality firms will not undertake to control their pollution. The answer is in government regulations. Coase argues that in perfect competition with laissez faire, govt regulation is not needed. Instead bargaining between the polluters and their victims can lead to an optimal situation. But this pre supposes equality in bargaining, and does not take note of ecological consequences of pollution.
Price elasticity of supply measures how much the quantity supplied of a good responds to changes in its price. Supply is more elastic when producers can easily increase output by utilizing spare capacity, high stock levels, short production times, or flexible reallocation of resources. Supply is inelastic when producers face constraints increasing output in response to higher prices. The elasticity of supply determines whether a change in demand results in a large or small change in price.
Supply-side policies aim to improve the productive potential of an economy through various market-led and state intervention approaches. Market-led policies focus on making markets more competitive through deregulation and tax cuts, while state intervention aims to overcome market failures. The objectives of supply-side policies include improving skills, productivity, investment, and competitiveness. Successful supply-side policies could achieve sustained low inflation growth and reduce unemployment. However, the effects of supply-side policies can take a long time to materialize and not all policies effectively pick winners. Evaluating their impact also requires considering demand-side conditions and issues like inequality and sustainability.
A market can be defined as a group of firms willing and able to sell a similar product or service to the same potential buyers.
Imperfect competition covers all situations where there is neither pure competition nor pure monopoly.
Perfect competition and pure monopoly are very unlikely to be found in the real world.
In the real world, it is the imperfect competition lying between perfect competition and pure monopoly.
The fundamental distinguishing characteristic of imperfect competition is that average revenue curve slopes downwards throughout its length, but it slopes downwards at different rates in different categories of imperfect competition.
Monopoly refers to the market situation where there is a
Single seller selling a product which has no close substitutes.
Monopolies are characterized by a lack of economic competition to produce the good or service, a lack of viable substitute goods, and the existence of a high monopoly price well above the firm's marginal cost that leads to a high monopoly profit
The word “oligopoly” comes from the Greek “oligos” meaning "little or small” and “polein” meaning “to sell.” When “oligos” is used in the plural, it means “few” ,few firms or few sellers.
DEFINATION:
Oligopoly is that form of market where there are few firms and there is natural interdependence among the firms regarding price and output policy.
This document defines and provides examples of consumer surplus and producer surplus. Consumer surplus is the difference between what consumers are willing to pay for a good and what they actually pay, represented by the area under the demand curve. Producer surplus is the difference between the price producers are willing to supply a good for and the actual market price, shown as the area above the supply curve. The levels of consumer and producer surplus change with market price fluctuations. At equilibrium, consumer surplus is the area under the demand curve above the market price, while producer surplus is the area above the supply curve below the market price.
Pigouvian taxes are taxes imposed to reduce negative externalities. They work by taxing activities based on consumption levels, so that those who consume more pay more in tax. This encourages reduced consumption of the taxed product or activity. The document discusses how Pigouvian taxes have been implemented in New Zealand on cigarettes, alcohol, fossil fuels and carbon emissions. It notes the taxes can help reduce negative externalities while funding benefits for the community and environment. However, it also acknowledges disadvantages like increased business costs and the inability to completely stop consumption of taxed products.
The document discusses the demand for labor from the perspective of individual firms and the overall labor market. It explains that in the short-run, a firm's demand for labor (its marginal revenue product curve) depends on the marginal product of labor. In the long-run, when both capital and labor are variable, firms will substitute between the two inputs in response to wage changes. The market demand for labor is less elastic than the sum of individual firm demands, due to product price effects. The elasticity of labor demand depends on factors like the elasticity of product demand and the share of labor costs in total costs.
This document discusses measuring poverty and inequality. It outlines four criteria for measuring inequality: anonymity, population, relative income, and Dalton principles. It also describes the Lorenz curve and five measures of inequality: range, Kuznets ratio, mean absolute deviation, coefficient of variation, and Gini coefficient. For poverty measurement, it defines the poverty line and discusses headcount ratio, poverty gap ratio, income gap ratio, and Foster-Greer-Thorbecke class measures.
This document discusses models of duopoly, where there are two firms in an industry. It describes Cournot's model of duopoly, where each firm assumes the other will not change output and they reach an equilibrium with each supplying 1/3 of the market. It also covers Chamberlin's model, where firms recognize their interdependence and independently set the monopoly price to maximize joint profits. Finally, it mentions Bertrand's model which differs from Cournot's in its behavioral assumptions about how firms respond to each other.
Individual supply is the supply of an individual producer at each price. Market supply is the sum of the individual supply schedules of all producers in the industry
Open-Economy Macroeconomics: Basic ConceptsChris Thomas
This document provides an overview of key concepts in open-economy macroeconomics. It defines open and closed economies, and describes how an open economy interacts through international trade and financial flows. It explains exports, imports, the trade balance, and factors that influence them. It also discusses net capital flows, interest rates, and the relationship between saving, investment, and international flows. Finally, it introduces nominal and real exchange rates, and the theory of purchasing power parity.
AS How markets and prices allocate resourcesOliver Pratten
This document discusses how markets allocate resources through the interaction of economic agents and prices. It identifies the three main economic agents as consumers, producers, and owners of factors of production. Consumers aim to consume as much as possible for the lowest cost, producers aim to maximize profits, and owners of factors aim to sell their resources to the highest bidder. Adam Smith argued that if each agent acts in their own self-interest, the invisible hand of the market will ensure resources are allocated to producing goods and services that are most valued. Prices ration scarce resources, provide incentives to producers, and signal information to all agents.
1) Collusion between businesses aims to maximize joint profits by restricting output and fixing higher prices. This lowers costs from competition but reduces uncertainty.
2) When there are a few dominant firms in an oligopoly, they can engage in restrictive practices like price fixing through cooperation. This allows them to set prices above costs for higher profits.
3) Price fixing cartels are more likely to form when industries have weak regulation, communication between firms is good, and products are standardized, making coordination easier. However, cartels are unstable due to incentives for some firms to cheat and overproduce.
The document discusses four key functions of public finance: allocation, distribution, stabilization, and growth. It also discusses principles for evaluating a good tax system, including revenue adequacy, stability, simplicity, tax neutrality, economic efficiency, and low administration and compliance costs. The document compares tax systems before and after reforms, noting the need to tailor reforms to a country's existing economic system and administrative capabilities.
This document discusses public goods and market failure. It defines public goods as non-excludable and non-rival, meaning that individuals cannot be excluded from use and one individual's use does not reduce availability to others. It provides examples such as national defense. The document notes that public goods cause market failure due to missing markets and underprovision by the private sector. It also discusses quasi-public goods and how technology has blurred the distinction between public and private goods in some cases.
Consumer Behavior: Income and Substitution Effects
The Consumer’s Reaction to a Change in Income
Engel Curve or Engel’s Law
The Consumer’s Reaction to a Change in Price
The Consumer’s Demand Function
Cobb-Douglas Utility Function
The Slutsky Substitution Effect
The Hicks substitution effect
The document discusses the key aspects of pure monopoly, including:
1) Pure monopolies have a single seller, no close substitutes for their unique product, and strong barriers to entry that prevent competition.
2) Monopolists are price makers that can control price without competition.
3) Monopolies can arise from economies of scale, legal barriers like patents, or control of essential resources.
4) A profit-maximizing monopolist will produce less output and charge a higher price than would be socially optimal, resulting in deadweight loss.
This document discusses the economic concepts of supply and demand. It defines key terms like markets, demand curves, determinants of demand and supply, and equilibrium. It explains how supply and demand interact through examples of how changes in demand or supply can shift the curves and impact equilibrium price and quantity. For example, an increase in demand from hot weather leads to a higher equilibrium price and quantity sold of ice cream.
This document discusses elasticity and its application to analyzing supply and demand. It defines price elasticity of demand as the percentage change in quantity demanded given a percentage change in price. Price elasticity is computed by taking the percentage change in quantity divided by the percentage change in price. Demand can be inelastic, elastic, perfectly inelastic, or perfectly elastic depending on whether the percentage change in quantity is less than, greater than, equal to zero, or infinite compared to the percentage change in price. Income elasticity and cross price elasticity are also discussed.
This document summarizes key concepts related to market failures caused by externalities and asymmetric information. It discusses how efficiently functioning markets allocate resources, the concepts of consumer and producer surplus, and how externalities can lead to overproduction or underproduction. Government interventions like taxes, subsidies and direct controls are described as ways to correct for externalities. The document also introduces the concept of asymmetric information and how it can lead to market failures.
Market failure occurs when the free market does not allocate resources efficiently. There are several types of market failures: externalities, where external costs and benefits are not reflected in prices; public goods, which are non-excludable and non-rivalrous and therefore underprovided by the market; imperfect information, where asymmetric information between buyers and sellers can lead to problems like adverse selection and moral hazard; and monopoly power, where a lack of competition results in a deadweight loss. These situations result in resources being over-allocated or under-allocated from a societal perspective.
1. Economics is concerned with making optimal choices given scarce resources. Scarcity means that economic wants exceed society's ability to produce goods and services.
2. Individuals and societies face an economizing problem of allocating limited resources between competing ends. This requires making tradeoffs which impose opportunity costs.
3. Production possibilities frontiers illustrate the key economic ideas of scarcity, choice, opportunity cost and tradeoffs graphically for societies. The slope of the PPF represents the opportunity cost of producing more of one good.
This chapter discusses public goods, market failures, and government failures related to the provision of public goods. It defines public goods as non-rival and non-excludable and explains that the free-rider problem prevents efficient private provision. Cost-benefit analysis can determine the optimal level of public goods provision, but voting mechanisms and interest groups can lead to inefficient outcomes. Government failures include problems with voting systems, bureaucracy, and rent-seeking behavior that reduce efficiency.
Market failures such as externalities can cause markets to be inefficient and produce either too much or too little of a good relative to the social optimum. Negative externalities like pollution lead to an overallocation of resources, while positive externalities like education lead to underallocation. Government intervention through command-and-control policies or market-based policies like Pigouvian taxes or tradable permits can help internalize these externalities and achieve efficiency. However, collective action problems mean global issues like climate change require international agreements, though these remain non-binding with issues around equity and enforcement.
market failure is one of the emerging problem in nation...it can cause uncertinity among the stake holders which effect the prices of the commodities to rise up,,,and it effects the whole economy...
This document provides an overview of imperfect competition, including monopoly, oligopoly, and monopolistic competition. It discusses the key differences between imperfect and perfect competition. Specifically, it covers:
1) The three types of imperfect competition and how they differ from perfect competition in terms of number of firms, price flexibility, entry/exit, and potential for economic profits.
2) The five sources of monopoly power, with a focus on economies of scale as the most enduring source due to decreasing average costs.
3) How monopolists determine profit-maximizing output by setting marginal revenue equal to marginal cost, which results in a smaller output and higher price than the socially optimal level.
4) Examples are provided
The document discusses various concepts related to markets and market equilibrium including:
- Changes in supply and demand can occur due to factors like changes in tastes, income levels, prices of related goods, technology, resource prices, taxes, and expectations of producers and consumers.
- These changes can lead to increases or decreases in price and quantity depending on whether demand or supply increases or decreases.
- Supply may be upward sloping due to increasing costs of production, but can also be flat if costs are constant.
- Government policies like price floors and ceilings can be used to address issues like inequality but may also create inefficiencies like surpluses or shortages.
- Market failures like public goods, externalities,
The document discusses the concepts of equity and efficiency in economics. It defines equity as fairness in how a society's production or income is divided among the population. There are two types of equity: horizontal equity, where those with equal ability to earn should pay equal tax rates, and vertical equity, where those who earn more should pay higher tax rates. The document states that equity and efficiency can be achieved together with government intervention, but there is typically a tradeoff between the two without intervention. Market efficiency is attained when resources are allocated to maximize total surplus, which is the sum of consumer and producer surplus. Sources of market inefficiency include price controls, taxes/subsidies, monopoly power, and externalities.
The document discusses different types of market failures including imperfect competition, externalities, absence of property rights, public goods, and imperfect information. It provides examples of each type of market failure and how they can lead to inefficient market outcomes. Specifically, it examines how externalities from production and consumption can create divergence between private and social costs/benefits, resulting in an inefficient allocation of resources where the socially optimal quantity is not produced. This market failure occurs because prices only reflect private costs and benefits, ignoring external effects on third parties.
This document provides an overview of market failures and the role of government in addressing them. It discusses how public goods, externalities, market power, and inequity can lead to market failures. The government aims to intervene to correct market failures and achieve a socially optimal output. However, government intervention also risks government failure if it fails to improve or worsens economic outcomes. A combination of market and government systems may be needed to determine the optimal mix of goods for society.
The document discusses externalities and how they can lead to market failures. It defines externalities as uncompensated impacts of one person's actions on another. Externalities are classified as either negative or positive. Negative externalities like pollution cause markets to produce more than the socially optimal quantity, while positive externalities like education benefits cause markets to produce less than optimal. Government policies like taxes and regulations aim to internalize externalities and correct inefficient market outcomes.
Market Failure - Market power 2022.pptxJon Newland
Market failures can occur when:
1) Producers have monopoly power and restrict supply, raising prices above efficient levels.
2) Externalities are not accounted for, resulting in too much or too little of a good being produced.
3) Information is not perfectly shared, preventing markets from allocating resources efficiently.
Government intervention aims to address these market failures through taxes, subsidies, and regulations to improve efficiency and equity. However, excessive intervention can also lead to government failures and reduced welfare.
This document provides an overview of pure monopoly, including its key characteristics, examples, and barriers to entry. It also discusses how a pure monopolist determines the profit-maximizing price and output level by setting marginal revenue equal to marginal cost and choosing the quantity where total revenue is maximized. Finally, it examines the economic effects of monopoly, including inefficiency due to underproduction compared to perfect competition.
This document discusses externalities and how they can lead to market failures. It defines externalities as uncompensated impacts of one person's actions on another. Negative externalities cause markets to overproduce goods, while positive externalities cause underproduction. The document outlines different policy approaches governments can use to correct externalities, such as Pigouvian taxes, regulation, and tradable pollution permits. It also discusses how private solutions may work using Coase theorem, but often high transaction costs require public policy interventions.
This document provides an overview of monopolistic competition and oligopoly market structures. It discusses key characteristics of these structures including differentiated products, strategic behavior between firms, and various models that can be used to analyze oligopoly interactions such as the kinked demand curve model, collusion models, and price leadership models. It also covers topics like industry concentration, advertising, efficiency, and the use of game theory to analyze oligopolistic strategic behavior.
micro economics -a complete understanding of economicsskEdutrust
This document discusses market structures such as monopoly, monopolistic competition, and oligopoly. It provides definitions and key characteristics of each market structure. For monopoly, it describes the single seller, barriers to entry, demand and revenue curves, and profit maximization conditions. Monopolistic competition involves many sellers of differentiated products. Features include product differentiation, free entry and exit, and non-price competition. Oligopoly refers to a market with a small number of sellers.
This chapter discusses demand, supply, and market equilibrium. It defines key concepts such as demand and supply curves, quantity demanded and supplied, equilibrium price and quantity, excess demand and supply. The chapter explains the laws of demand and supply - that demand curves slope downward and supply curves slope upward. It discusses how individual demand and supply combine to form market demand and supply curves and how equilibrium is reached at the price where quantity demanded equals quantity supplied. The chapter also provides examples and diagrams to illustrate these concepts.
The document discusses monetary policy tools and their effects on economic variables. It describes the Federal Reserve's dual mandate of maximum employment and price stability. The four main tools of monetary policy are open market operations, the discount window, administered rates, and forward guidance. Expansionary monetary policy works to increase money supply and lower interest rates to boost aggregate demand and GDP during recessions. Contractionary policy has the opposite effects to curb inflation. Evaluation of monetary policy addresses its advantages over fiscal policy as well as limitations.
The document summarizes key concepts about money, the money supply, and monetary policy in the United States. It explains that the US dollar is issued by the Federal Reserve and backed by the US government. It describes how the Federal Reserve, made up of the Board of Governors and regional banks, implements monetary policy to control interest rates through managing the money supply. It also outlines how money serves important functions as a medium of exchange, unit of account, and store of value in the US economy.
This document provides an overview of key concepts in financial economics, including:
1) Financial investment involves purchasing financial or real assets with the goal of earning a profit. Popular investments include stocks, bonds, mutual funds, and real estate.
2) The time value of money recognizes that a dollar today is worth more than a dollar in the future due to interest earnings. Present and future value calculations allow comparison of cash flows over time.
3) Investments like stocks, bonds, and mutual funds offer return potential but also come with risk; diversification across multiple assets can help reduce risk. Generally, higher risk investments provide higher potential returns.
This document provides an overview of bond market analysis using the demand-supply framework. It discusses the three approaches to analyzing bond markets (bond market framework, loanable funds framework, and liquidity preference framework) and focuses on the bond market framework. This framework models the bond market as an interaction between the demand for bonds from savers/lenders and the supply of bonds from spenders/borrowers. The document outlines the key determinants of demand and supply, and how shifts in demand or supply curves affect the equilibrium price, quantity, and interest rate in the bond market. It also discusses how secondary bond markets and actions by the Federal Reserve can impact the demand curve.
Econ452 Learning unit 12 - part 2 - 2021 springsakanor
This document provides an overview of internal economies of scale and imperfect competition in international trade. It discusses how internal economies of scale allow some firms to gain cost advantages over others, concentrating production in better performing firms. This concentration improves overall industry efficiency. The document also describes how imperfect competition and product differentiation can lead to intra-industry trade between countries, even without comparative advantage differences. Firms benefit from access to larger integrated markets, while consumers enjoy more variety. Trade integration tends to improve industry performance as best firms expand and worst firms contract.
Econ452 Learning unit 12 - part 1 - 2021 springsakanor
1) The document discusses external economies of scale and how they can lead to increasing returns and changing patterns of international trade.
2) External economies occur when costs decrease as the size of an entire industry increases, rather than for individual firms. They arise from factors like specialized suppliers and labor pooling.
3) Models with external economies show countries specializing based on historical accidents rather than comparative advantage. Trade allows concentrating production where costs are lowest.
Econ452 Learning unit 11 - part 2 - 2021 springsakanor
This document provides an overview of various instruments of trade policy, including non-tariff barriers and their effects. It discusses how quotas, export subsidies, import quotas, and voluntary export restraints influence trade flows and impact welfare. Transportation costs are also examined as they can act as a non-tariff barrier by raising import prices. The impacts of these policies are evaluated in terms of how they affect producer and consumer surplus within countries.
Econ452 Learning unit 11 - part 1 - 2021 springsakanor
This document provides an overview of trade policy instruments like tariffs and their economic effects. It begins by outlining the objectives and introduction. It then defines trade policies and instruments like tariffs, quotas, and subsidies.
It explains how to analyze the effects of tariffs using partial equilibrium models and consumer/producer surplus concepts. Tariffs reduce consumer surplus but increase producer surplus and government revenue. However, they also create deadweight losses that reduce total welfare.
The document compares equilibrium and welfare under autarky, free trade, and a tariff for small and large countries. While a tariff benefits some domestic producers, it reduces total welfare due to higher domestic prices and lower imports/consumption.
This document provides an overview of international trade models and how they can be applied to analyze economic growth and international borrowing/lending. It discusses how balanced and biased economic growth can impact trade patterns and welfare. Biased growth that shifts production more towards a country's export good can lower its terms of trade and immiserize it. The standard trade model is modified to analyze intertemporal trade, where countries can borrow goods today in exchange for goods tomorrow. This allows specialization across time without sacrificing current consumption.
The document summarizes key concepts in macroeconomics including:
- Short-run and long-run aggregate supply curves
- How economies automatically adjust toward full employment equilibrium over time
- Demand-pull and cost-push inflation
- The Phillips curve relationship between inflation and unemployment
- How supply shocks and monetary policy impact the Phillips curve relationship
- Supply-side economics and how fiscal policy can shift aggregate supply
- The Laffer curve relationship between tax rates and tax revenue
This document provides an overview of aggregate demand and aggregate supply models. It discusses the key components of aggregate demand and aggregate supply including:
1) Aggregate demand is determined by consumption, investment, government spending, and net exports and shown as a downward sloping curve. A decrease in aggregate demand can cause recession while an increase can cause inflation.
2) Aggregate supply is determined by costs of production and shown as an upward sloping curve in the short-run and vertical in the long-run. A decrease can cause both recession and inflation known as stagflation.
3) Equilibrium occurs where aggregate demand and supply intersect determining output and price levels. Changes in demand or supply can shift curves
Econ452 Learning Unit 11 - Part 2 - 2020 fallsakanor
This document discusses internal economies of scale and imperfect competition in international trade. It explains that internal economies of scale allow larger firms to have lower costs than smaller firms, leading industries to become imperfectly competitive. This causes some firms to thrive while others contract. The document also describes how imperfect competition can result in intra-industry trade of similar goods between countries. It provides examples of how economic integration through trade agreements has affected industries like automobiles.
Econ452 Learning Unit 11 - Part 1 - 2020 fallsakanor
1) The document discusses how external economies of scale can lead to international trade even when countries have identical production possibilities. With external economies, the production possibilities frontier becomes convex, allowing for gains from specialization and trade.
2) It explains that external economies occur when industry-wide costs decrease as industry size increases, due to factors like specialized suppliers. This can result in one country dominating production of a good globally due to lower costs.
3) The document notes that established industries, even if not the most efficient, may remain dominant due to network effects from their head start, illustrating path dependence in trade patterns from external economies.
Econ452 Learning Unit 10 - Part 2 - 2020 fallsakanor
This document discusses various non-tariff barriers (NTBs) to trade such as quotas, export subsidies, import quotas, and voluntary export restraints. It explains how each of these policies affect trade flows and impact producer surplus, consumer surplus, and national welfare in exporting and importing countries. Specifically, it analyzes the effects of the EU's agricultural export subsidies and the US sugar import quota. It also covers how transportation costs, local content requirements, and technological changes have impacted patterns of international trade over time.
Econ452 Learning Unit 10 - Part 1 - 2020 fallsakanor
This document provides an overview of tariffs as an instrument of trade policy. It discusses:
1. The objectives of understanding tariffs and their effects on trade patterns, welfare, and income distribution.
2. How tariffs work as a tax on imports, affecting supply and demand in domestic and world markets. Tariffs can create costs through deadweight loss.
3. Tools for analyzing the effects of tariffs, including partial equilibrium models and concepts of consumer surplus, producer surplus, and total surplus to measure costs and benefits. Tariffs typically reduce total welfare.
Econ452 Learning Unit 09 - Part 2 - 2020 fallsakanor
This document discusses the standard trade model and equilibrium trade. It covers:
1) The relationship between production possibility frontiers, relative supply curves, preferences, and relative demand curves.
2) How world equilibrium is determined by the intersection of world relative supply and demand.
3) How trade patterns are established based on relative prices and the gains from trade when prices change from the autarky level.
Econ452 Learning Unit 09 - Part 1 - 2020 fallsakanor
The standard trade model is used to determine optimal production and consumption under autarky. It shows that countries will produce more of the good where they have a comparative advantage based on differences in production possibility frontiers or preferences between countries. This leads to different equilibrium relative prices and combinations of goods produced and consumed under autarky in each country. Trade allows both countries to benefit by specializing in their comparative advantage good.
1. The document discusses the Heckscher-Ohlin model of international trade, which predicts that countries will export goods that intensively use their abundant factors of production.
2. The model shows that trade leads to specialization according to comparative advantage and a convergence of factor prices and relative prices between countries.
3. While trade creates overall gains, it also shifts income between factors of production - in labor abundant countries, labor gains and capital loses from trade, and vice versa in capital abundant countries.
This document provides an overview of resources and trade in the long run. It describes factor abundance and factor intensity, and how they relate to differences in resources across countries and production methods. Factor abundance is determined by comparing relative factor prices between countries, while factor intensity is determined by comparing input combinations among products. The document uses isoquant-isocost analysis to show how firms choose optimal input combinations given input prices, and how relative factor prices affect factor demand. It explains the Stolper-Samuelson theorem relating factor prices to good prices, and the Rybczynski theorem relating factor increases to output changes.
The document discusses how international trade affects income distribution through winners and losers both in the short-run and long-run due to changes in relative prices and industry demands for factors of production. While trade creates overall gains, certain groups such as owners of immobile factors in import-competing industries experience losses in real income. Government policies aim to assist negatively impacted groups through retraining programs and income support to ease the costs of trade-induced unemployment and distributional changes.
2. Elemental Economics - Mineral demand.pdfNeal Brewster
After this second you should be able to: Explain the main determinants of demand for any mineral product, and their relative importance; recognise and explain how demand for any product is likely to change with economic activity; recognise and explain the roles of technology and relative prices in influencing demand; be able to explain the differences between the rates of growth of demand for different products.
Abhay Bhutada Leads Poonawalla Fincorp To Record Low NPA And Unprecedented Gr...Vighnesh Shashtri
Under the leadership of Abhay Bhutada, Poonawalla Fincorp has achieved record-low Non-Performing Assets (NPA) and witnessed unprecedented growth. Bhutada's strategic vision and effective management have significantly enhanced the company's financial health, showcasing a robust performance in the financial sector. This achievement underscores the company's resilience and ability to thrive in a competitive market, setting a new benchmark for operational excellence in the industry.
Lecture slide titled Fraud Risk Mitigation, Webinar Lecture Delivered at the Society for West African Internal Audit Practitioners (SWAIAP) on Wednesday, November 8, 2023.
BONKMILLON Unleashes Its Bonkers Potential on Solana.pdfcoingabbar
Introducing BONKMILLON - The Most Bonkers Meme Coin Yet
Let's be real for a second – the world of meme coins can feel like a bit of a circus at times. Every other day, there's a new token promising to take you "to the moon" or offering some groundbreaking utility that'll change the game forever. But how many of them actually deliver on that hype?
Independent Study - College of Wooster Research (2023-2024) FDI, Culture, Glo...AntoniaOwensDetwiler
"Does Foreign Direct Investment Negatively Affect Preservation of Culture in the Global South? Case Studies in Thailand and Cambodia."
Do elements of globalization, such as Foreign Direct Investment (FDI), negatively affect the ability of countries in the Global South to preserve their culture? This research aims to answer this question by employing a cross-sectional comparative case study analysis utilizing methods of difference. Thailand and Cambodia are compared as they are in the same region and have a similar culture. The metric of difference between Thailand and Cambodia is their ability to preserve their culture. This ability is operationalized by their respective attitudes towards FDI; Thailand imposes stringent regulations and limitations on FDI while Cambodia does not hesitate to accept most FDI and imposes fewer limitations. The evidence from this study suggests that FDI from globally influential countries with high gross domestic products (GDPs) (e.g. China, U.S.) challenges the ability of countries with lower GDPs (e.g. Cambodia) to protect their culture. Furthermore, the ability, or lack thereof, of the receiving countries to protect their culture is amplified by the existence and implementation of restrictive FDI policies imposed by their governments.
My study abroad in Bali, Indonesia, inspired this research topic as I noticed how globalization is changing the culture of its people. I learned their language and way of life which helped me understand the beauty and importance of cultural preservation. I believe we could all benefit from learning new perspectives as they could help us ideate solutions to contemporary issues and empathize with others.
OJP data from firms like Vicinity Jobs have emerged as a complement to traditional sources of labour demand data, such as the Job Vacancy and Wages Survey (JVWS). Ibrahim Abuallail, PhD Candidate, University of Ottawa, presented research relating to bias in OJPs and a proposed approach to effectively adjust OJP data to complement existing official data (such as from the JVWS) and improve the measurement of labour demand.
The Rise of Generative AI in Finance: Reshaping the Industry with Synthetic DataChampak Jhagmag
In this presentation, we will explore the rise of generative AI in finance and its potential to reshape the industry. We will discuss how generative AI can be used to develop new products, combat fraud, and revolutionize risk management. Finally, we will address some of the ethical considerations and challenges associated with this powerful technology.
Abhay Bhutada, the Managing Director of Poonawalla Fincorp Limited, is an accomplished leader with over 15 years of experience in commercial and retail lending. A Qualified Chartered Accountant, he has been pivotal in leveraging technology to enhance financial services. Starting his career at Bank of India, he later founded TAB Capital Limited and co-founded Poonawalla Finance Private Limited, emphasizing digital lending. Under his leadership, Poonawalla Fincorp achieved a 'AAA' credit rating, integrating acquisitions and emphasizing corporate governance. Actively involved in industry forums and CSR initiatives, Abhay has been recognized with awards like "Young Entrepreneur of India 2017" and "40 under 40 Most Influential Leader for 2020-21." Personally, he values mindfulness, enjoys gardening, yoga, and sees every day as an opportunity for growth and improvement.
"Does Foreign Direct Investment Negatively Affect Preservation of Culture in the Global South? Case Studies in Thailand and Cambodia."
Do elements of globalization, such as Foreign Direct Investment (FDI), negatively affect the ability of countries in the Global South to preserve their culture? This research aims to answer this question by employing a cross-sectional comparative case study analysis utilizing methods of difference. Thailand and Cambodia are compared as they are in the same region and have a similar culture. The metric of difference between Thailand and Cambodia is their ability to preserve their culture. This ability is operationalized by their respective attitudes towards FDI; Thailand imposes stringent regulations and limitations on FDI while Cambodia does not hesitate to accept most FDI and imposes fewer limitations. The evidence from this study suggests that FDI from globally influential countries with high gross domestic products (GDPs) (e.g. China, U.S.) challenges the ability of countries with lower GDPs (e.g. Cambodia) to protect their culture. Furthermore, the ability, or lack thereof, of the receiving countries to protect their culture is amplified by the existence and implementation of restrictive FDI policies imposed by their governments.
My study abroad in Bali, Indonesia, inspired this research topic as I noticed how globalization is changing the culture of its people. I learned their language and way of life which helped me understand the beauty and importance of cultural preservation. I believe we could all benefit from learning new perspectives as they could help us ideate solutions to contemporary issues and empathize with others.
2. 4-2
Market Failures
• Competitive markets usually allocate
economy’s scarce resources efficiently.
• Market failures: Markets fail to produce the
right amount of the product
• Relative to efficient allocation of resources,
under market failure resources may be
‒ Over-allocated
‒ Under-allocated
LO1
3. 4-3
Demand-Side Market Failures
• Demand-side market failures
• When it is not possible to charge consumers
for the product
• Some can enjoy benefits without paying
• Firms not willing to produce since they cannot
cover the costs
LO1
4. 4-4
Supply-Side Market Failures
• Supply-side market failures
• Occurs when a firm does not pay the full cost
of producing its output
• External costs of producing the good are not
reflected in supply
LO1
5. 4-5
Efficiently Functioning Markets
• Demand curves must reflect the consumers
full willingness to pay
• Supply curve must reflect all the costs of
production
LO2
6. 4-6
Consumer and Producer Surplus
• There is only one price in the market
(equilibrium price) which every consumer
pays and every producer receives.
• At the equilibrium, the market clears –
whoever willing to pay gets products, and
whoever willing to sell produces products.
• However, each consumer may value the
product differently, while each producer
produces at different cost.
LO2
7. 4-7
Consumer Surplus
• Consumer surplus
• Difference between what a consumer is
willing to pay for a good and what the
consumer actually pays
• Extra benefit from paying less than the
maximum price
LO2
8. 4-8
Consumer Surplus
LO2
Consumer Surplus
(1)
Person
(2)
Maximum Price
Willing to Pay
(3)
Actual Price
(Equilibrium
Price)
(4)
Consumer
Surplus
Bob $13 $8 $5 (=$13-$8)
Barb 12 8 4 (=$12-$8)
Bill 11 8 3 (=$11-$8)
Bart 10 8 2 (=$10-$8)
Brent 9 8 1 (= $9-$8)
Betty 8 8 0 (= $8-$8)
10. 4-10
Producer Surplus
• Producer surplus
• Difference between the actual price a
producer receives and the minimum price
they would accept
• Extra benefit from receiving a higher price
LO2
13. 4-13
Total Surplus
• Total surplus: Sum of consumer surplus and
producer surplus
• Total benefits that an economy gains.
• The economy should produce a quantity of
product that maximizes total surplus -
Efficiency.
LO2
15. 4-15
Efficient Allocation
• Productive efficiency
• Producing goods in the least costly way
• Competition forces producers to produce
least costly way
• Allocative efficiency
• Producing the right mix (quantity) of goods
• Competition leads to the equilibrium
quantity where total surplus is maximized
LO4
16. 4-16
Efficient Allocation in Market
System
• Three Conditions at Equilibrium
• MB = MC
‒ MB (Marginal benefit): the benefit that the last
unit in market provides to consumers
‒ MC (Marginal cost): the producer’s cost to
produce the last unit in market
• Maximum willingness to pay = minimum
acceptable price
• Total surplus is at a maximum
LO2
17. 4-17
Efficiency Losses
• If the economy produces more or less than
the optimal quantity at the equilibrium, its
total surplus will be reduced.
• Efficiency losses (or deadweight losses):
reductions of combined consumer surplus and
producer surplus.
LO2
18. 4-18
Efficiency Losses due to
Underproduction
• Efficiency loss (or deadweight losses)
LO2 Quantity (bags)
Price(perbag)
c
S
Q1Q2
D
b
d
a
e
Efficiency loss
from underproduction
19. 4-19
Efficiency Losses due to
Overproduction
LO2
c
S
Q1 Q3
D
b
f
a
g
Quantity (bags)
Price(perbag)
Efficiency loss
from overproduction
20. 4-20
Causes of Efficiency Losses
• The economy may produce more or less than
the optimal quantity at the equilibrium (not
achieve the equilibrium) under
‒ Government’s control of the price or quantity
in the market (Price ceiling and floor)
‒ Government’s taxes and subsidies
‒ Public Goods
‒ Externalities
LO2
21. 4-21
1. The market is efficient
with marginal benefit
equal to marginal cost.
Price Ceiling
Figure shows an efficient
housing market.
2. Consumer surplus plus ...
3. Producer surplus is as
large as possible.
22. 4-22
Price Ceiling
Figure shows the inefficiency
of a rent ceiling.
A rent ceiling restricts the
quantity supplied and
marginal benefit exceeds
marginal cost.
23. 4-23
Price Ceiling
1. Consumer surplus
increases.
2. Producer surplus shrinks.
3. A deadweight loss arises.
Resource use is inefficient.
.
Consumer
24. 4-24
Price Floor
Figure shows an efficient
labor market.
1. At the market equilibrium,
the marginal benefit of
labor to firms equals the
marginal cost of working.
2. The sum of the firms’ and
workers’ surpluses is as
large as possible.
25. 4-25
Price Floor
Figure shows an inefficient
labor market with a
minimum wage.
The minimum wage restricts
the quantity demanded.
1. The firms’ surplus shrinks.
2. The workers’ surplus
shrinks.
26. 4-26
Price Floor
1. The firms’ surplus shrinks.
2. The workers’ surplus
increases.
3. A deadweight loss arises.
The outcome is inefficient.
27. 4-27
Private Goods
• Private goods are mostly produced in the
market by (for-profit) firms
• Rivalry: Once one person buys and
consumes a product, it is no longer
available for another person.
• Excludability: Sellers can keep persons who
do not pay for a product from obtaining its
benefits.
LO3
28. 4-28
Public Goods
• Public goods are most likely provided by
government (because for-profit firms will not
produce them)
• Nonrivalry: One person’s consumption of a
good does not preclude consumption of the
same good by others.
• Nonexcludability: Cannot exclude
individuals from the benefit of the good.
LO3
29. 4-29
Free-Rider Problem
• Free-rider problem: The inability of potential
providers of goods to obtain payment from
those who benefit
• Due to nonexcludability (and nonrivarlry)
• Because of free-rider problem, the public
goods are usually not provided by firms even
though products are desirable for the
economy.
LO3
30. 4-30
Demand for Public Goods
LO3
Demand for a Public Good, Two Individuals
(1)
Quantity of
Public Good
(2)
Adams’ Willingness to
Pay (Price)
(3)
Benson’s
Willingness to
Pay (Price)
(4)
Collective Willingness
to Pay (Price)
1 $4 + $5 = $9
2 3 + 4 = 7
3 2 + 3 = 5
4 1 + 2 = 3
5 0 + 1 = 1
31. 4-31
Demand for Public Goods
LO3
$6
5
4
3
2
1
0
P
Q1 2 3 4 5
$6
5
4
3
2
1
0
P
Q1 2 3 4 5
Adams
Benson
D1
D2
Adams’ Demand
Benson’s Demand
$3 for 2 Items
$4 for 2 Items
$1 for 4 Items
$2 for 4 Items
$9
7
5
3
1
0
P
Q1 2 3 4 5
Collective Demand and Supply
DC
SCollective Demand
$7 for 2 Items
$3 for 4 Items
Optimal
quantity
Collective
willingness
to pay
32. 4-32
Cost-Benefit Analysis
• The government needs to apply the cost-
benefit analysis to determine quantities of
public goods it provides, because the market
system fails to determine the optimal quantity
of production.
• Cost: Resources diverted from private good
production
• Benefit: The extra satisfaction from the output
of more public goods
LO4
33. 4-33
Cost-Benefit Analysis
LO4
Cost-Benefit Analysis for a National Highway Construction Project (in Billions)
(1)
Plan
(2)
Total Cost of
Project
(3)
Marginal
Cost
(4)
Total
Benefit
(5)
Marginal
Benefit
(6)
Net Benefit
(4) – (2)
No new construction $0 $0 $0
A: Widen existing highways 4 $4 5 $5 1
B: New 2-lane highways 10 6 13 8 3
C: New 4-lane highways 18 8 22 10 5
D: New 6-lane highways 28 10 26 3 -2
34. 4-34
Quasi-Public Goods
• Quasi-public goods (private goods by
definition) could be provided through the
market system
• Because of positive externalities the
government provides them
• Examples are education, streets, museums
LO4
35. 4-35
The Reallocation Process
• Government
• Taxes individuals and businesses
• Takes the money and spends on production
of public goods
LO4
36. 4-36
Externalities
• An externality is a cost or benefit accruing to a
third party external to the market transaction
• Positive externalities (benefit to others)
• When a person consumes a good, others
who did not pay benefits from it.
• Negative externalities (cost to others)
• When a person consumes a good, it
imposes costs to others.
LO4
37. 4-37
Positive Externalities
• Only a part of benefits is paid by buyers
• Actual MB to the society is greater than
market demand (MB of persons who pay)
• Too little is produced
• Demand-side market failures
LO4
38. 4-38
Negative Externalities
• Only a part of costs is incurred by producers
• Actual MC (cost to the society) is greater than
market supply (MC of producers)
• Too much is produced
• Supply-side market failures
LO4
40. 4-40
Government Intervention
• Correct negative externalities
• Direct controls: Government restriction of
production
• Specific taxes: Raise MC to reflect true cost
to the society
‒ Shift the supply curve up
LO4
42. 4-42
Government Intervention
• Correct positive externalities
• Government provision: Government produces
additional good to supplement the private
production
• Subsidies to consumers: lower the price to
encourage consumers to purchase more
‒ Raise demand curve
• Subsidies to producers: lower the cost to
encourage producers to produce more
‒ Lower supply curve
LO4
44. 4-44
Government Intervention
LO4
Methods for Dealing with Externalities
Problem
Resource Allocation
Outcome Ways to Correct
Negative externalities
(spillover costs)
Overproduction of output
and therefore overallocation
of resources
1. Private bargaining
2. Liability rules and lawsuits
3. Tax on producers
4. Direct controls
5. Market for externality rights
Positive externalities
(spillover benefits)
Underproduction of output
and therefore
underallocation of resources
1. Private bargaining
2. Subsidy to consumers
3. Subsidy to producers
4. Government provision
46. 4-46
Government’s Role in the Economy
• Private solution: Coase theorem
• Private sector bargaining can solve
externality problem
• Government’s role in correcting externalities
• Optimal reduction of an externality
• Officials must correctly identify the
existence and cause
• Has to be done within a political
environment
LO5
47. 4-47
Controlling CO2 Emissions
• Cap and trade
• Sets a cap for the total amount of emissions
• Assigns property rights to pollute
• Rights can then be bought and sold
• Carbon tax
• Raises cost of polluting
• Easier to enforce
48. 4-48
Inadequate Information
• Asymmetric information: One party in
transaction does not know enough about the
other party to make accurate decisions.
• Underallocation of resources
• Better information too costly
LO6
49. 4-49
Inadequate Information
• Moral hazard problem: the risk that one party
to a transaction will engage in activities that
are undesirable from the other party’s point of
view.
• Occurs after the contract is signed
• Once purchased an insurance, buyers may
abuse using insurance.
LO6
50. 4-50
Inadequate Information
• Adverse selection problem: the people who
are the most undesirable from the other
party’s point of view are the ones who are
most likely to want to engage in the
transaction.
• Occurs before the contract is signed
• Those most in need of insurance will be those
who want purchase it most.
LO6
51. 4-51
Lemon Problem
• A lemons problems arises when it is not
possible to distinguish reliable products from
lemons (defective products).
• Buyers are only willing to pay at lemon price.
• Sellers of reliable products exit from market.
• Only lemon products remain in market.
52. 4-52
Principal-agent Problem
• The managers in control (the agent) act in
their own interest rather than in the interest
of the owners (the principal) due to different
sets of the incentives.
• Example: CEO of a corporation only cares
about getting all kind of benefits (luxury
office, chauffeured limousine, personal jet and
cruiser, etc.) which may not bring any benefits
or profits to shareholders of the corporation.
53. 4-53
Conflict of Interest
• Moral hazard problem that occurs when a
person or institution has multiple objectives
(interests) and has conflicts between them.
• Example: Arthur Andersen was supposed to
provide accurate financial information to
holders of Enron stocks (owners of Enron), but
instead it helped top managers of Enron in
expense of stockholders.