Unit 10 Market successes and failures

Question 1

Main causes of market failure

Answer 1

• externalities
• public goods
• asymmetric info

Question 2

Market success

Answer 2

perfectly competitive markets that affect no one other than the buyers and sellers that result in PE allocations - send the right signals

Question 3

Market failure

Answer 3

situation where resources aren’t efficiently allocated

Question 4

Examples of externalities

Answer 4

• pesticides in the Carribean
• overuse of antibiotics

Question 5

Total external cost

Answer 5

Area between MSC and MPC

Question 6

Marginal external cost

Answer 6

cost experienced by a 3rd party when an additional unit of output is produced

Question 7

Marginal social cost (the true cost)

Answer 7

MPC + MEC

Question 8

How to prevent market failures

Answer 8

• private bargaining
• quantity regulation
• taxing polluters forces compensation for damages

Question 9

Coasean bargaining

Answer 9

idea that private bargaining over external effects might be preferable to gov intervention
- parties have more info

Question 10

Interpret MEC > P - MPC

Answer 10

cost to society is too high - reducing output would be a pareto improvement

Question 11

Core rule for efficiency

Answer 11

MSC = MSB

Question 12

Public good

Answer 12

a good that, if available to anyone, can be made available to everyone at no extra cost
- key characteristic is non-rivalry
- (sometimes excludability is possible)

Question 13

Negative externalities

Answer 13

Cause harm to others but don’t pay for it
- eg banana growers, noise, inadequate safety measures, deforestation etc

Question 14

Positive externalities

Answer 14

Help others but don’t get paid for it
- eg vaccinations

Question 15

In private bargaining, does it matter who has the property rights?

Answer 15

no, if bargaining works you get the efficient outcome either way

Question 16

Obstacles to bargaining

Answer 16

• Impediments to collective action - different interests (types of fish), coalitions etc
• Missing or asymmetric info -
• Tradability and enforcement
• Limited funds

Question 17

Pigouvian tax

Answer 17

A tax on something that causes negative externalities
- raises the private cost to match the social cost

Question 18

Public good examples

Answer 18

defence, expert weather forecasting, radio, knowledge, street lighting, crime prevention etc

Question 19

Public bad examples

Answer 19

• CO2, unpleasant smelling drains etc

Question 20

Tragedy of the commons

Answer 20

• open access leads to overexploitation

Question 21

What does asymmetric info lead to?

Answer 21

1. Hidden actions (moral hazard)
   - you get insured, then drive recklessly bc you’re covered or choose not to lock your car
   - these actions hurt the insurer, but they can’t prove what you did
2. Hidden attributes (adverse selection
   - if only people who’re sick buy insurance, insurers raise prices
   - healthy people drop out, leaving all sick people to cover meaning the market may eventually collapse

Question 22

Adverse selection - ‘lemons’

Answer 22

• sellers know if a car is bad, buyers don’t
• buyers assume all cars might be lemons and offer low prices
• sellers with good cars won’t sell low
• only bad cars stay in the market

Question 23

When markets don’t exist

Answer 23

Repugnant markets - goods/services that go against our ethical norms, eg organ markets
Merit goods - goods/services that should be available for everyone, eg primary education, basic healthcare, legal rep etc