Efficiency and Non-Market Forces • Going ga-ga about markets – Review of Market Efficiency • Government’s Role in Economic Efficiency – Provides infrastructure for economic activity • Market Failures – 4 reasons markets break down / do not exist • Public Goods – What are they? How best to manage them?
Efficiency and Non-Market Forces. Going ga-ga about markets Review of Market Efficiency Government’s Role in Economic Efficiency Provides infrastructure for economic activity Market Failures 4 reasons markets break down / do not exist Public Goods What are they? How best to manage them?. - PowerPoint PPT Presentation
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Efficiency and Non-Market Forces
• Going ga-ga about markets– Review of Market Efficiency
• Government’s Role in Economic Efficiency– Provides infrastructure for economic activity
• Market Failures– 4 reasons markets break down / do not exist
• Public Goods– What are they? How best to manage them?
Revisiting Some Economic Concepts
• Value of Free Markets (bidding mechanism)– Maximize (total social benefit - cost)
• Pareto Efficient– Competition drives societies to PPF– Pareto Improvements
• Sharing the Economic Pie– Efficiency, Growth, Better Living Standards
• Markets work under some assumptions
The Government: not there just to take your money!
• Security– Internal; External; Preserves conditions for trade.
• Taxation– Pays for public goods; helps redistribute econ growth– Can increase efficiency & help create markets
Legal System
• Criminal • Property• Contract• Tort• Antitrust Law
– Price fixing; Monopoly; Mergers
Reasons for Market Failure
Why do markets fail in general?• Economic: Wealth Effect /Market Power• Externalities
– Negative – Positive
• Public Goods and Common Property Resources• Asymmetric Information
– Adverse selection (market for lemons)– Moral Hazard (risk insurance problem)
Unintended costs or benefits that are imposed on unsuspecting people and that result from the economic activity of others
– Subsidize the production of an environmentally friendly good making it less expensive
Externality
Price per Gallon
Gasoline (Gallons)
1.00 A
S
Qineff
D
Qeff
MSC = S + tax
B1.30
0.80
$1.50
Negative Externality – graph
Price
Number of Bachelor’s
Degrees
50,000A
S
Q
D
MSB = D + SubsidyB
$65,000
Positive Externality - graph
A market left on its own will not address the problem of negative externalities
What is Market Failure
Some Environmental Terms related to Market Failure• Social Cost
– This cost includes both the private costs of production and the externalities cost generated by its production
• Free Rider– Someone who consumes a good or service without
paying for it• Property Rights
– The right to own a good or service and the right to receive the benefits of the goods or service
• Goods whose benefits are not diminished even when additional people consume it and no one is excluded from its benefits– Roads– National defense– Lighthouse
Public Goods
Private / Mixed / Pure Public Goods
Can limit target market. Cannot prevent anyone from consuming it.
Non ExcludableExcludable
Private / Mixed / Pure Public Goods
One’s consumptiondeprives another
Benefits of joint consumption
Rival
Non Rival
Private / Mixed / Pure Public Goods
Private GoodHot Dogs, Cars,Houses
Mixed GoodFishing lakes,Grazing lands
Mixed GoodFreeway, BridgeCity Parks
Pure Public GoodDefensePublic Radio / TV
Non ExcludableExcludable
Rival
Non Rival
• The failure of the government to buy the quantity of public goods that generates maximum efficiency