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Flashcards in Chapter 2: Justifying government interventions Deck (12)
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1

1. Gurantee of property rights 

-> The rules defining ownership of property or contract laws: 

  • Submission to legally defined property rights as the resolution of a prisoners dilemma
  • Thomas Hobbes:
    • The institution of property rights is a first step away from this "State of nature" aka ANARCHY! 
    • Without property rights a satisfactory exchange of commodities could not take place given a LACK OF TRUST  between the parties 

2

Cost of a Instiution that implements rights:

  • Differenz der beiden individuen aufsummiert bildet die maximalen Kosten dieser implementation 

3

Coase Theorem 

1. EFFICIENCY HYPOTHESIS: 

  • Clear definition of property rights will produce economic efficiency thorugh trade 

2. IRRELEVANCE HYPOTHESIS:

  • In the absence of transaction cost the question of who gets the right may be irrelevant for the final result 
  • The later does not generally hold if there are income effects 

4

First Theorem of Welfare Economics 

Under certain assumptions, competitive equilibrium is Pareto ecient.

5

Pareto Optimum requires:

1. Optimal allocation of consumption:

2. Optimal allocation of production factors:

3. Optimal production structures: 

6

1. Optimal allocation of consumption

MRS identical across individuals 

  • Tangente indiffernece curves! Then the slope of the indiviuals cures are equalized 

7

2. Optimal allocation of production factors:

  • It must not be possible to reallocate factors such that the output in one sector increases without decreasing production in another sector.
  • Implications when isoquants are continuous and differentiable. Factors have the same ratio of marginal productivities in all sectors.

MARIGINAL RATE OF SUBSTITUIONS MUST BE TANGENT

8

3. Optimal production structure: 

MRS = MRT 

  • It must not be possible to increase the utility of one individual (w/o reducing the utility of another individual) by shifting production from x to y.

9

First Theorem of Welfare Econmics limits the possible justificatons for goverment interventions. 

What may remain as a task for goverments

1. Redistribution: If the market allocation is considered unjust 

 

10

Reasons for market power and monopolies

  1. Segmented markets through transport costs and tariffs
  2. Patents 
  3. Government concession 
  4. Collusion (Cartels)
  5. Natural monopolies due to economies of scale 

11

Options for government interventions against Monopolys 

  • Control of mergers
  • Enforcement of split ups
  • Penalties for cartels
  • Enforcement of net access
  • Price Cap
  • Rate-of-return regulation
  • Subsidies
  • Auction of monopoly

12

Auctioning

Goverment can try to extract monopoly rent by having an auction for some scarce licenses