Unit 10 Market successes and failures Flashcards
(23 cards)
Main causes of market failure
- externalities
- public goods
- asymmetric info
Market success
perfectly competitive markets that affect no one other than the buyers and sellers that result in PE allocations - send the right signals
Market failure
situation where resources aren’t efficiently allocated
Examples of externalities
- pesticides in the Carribean
- overuse of antibiotics
Total external cost
Area between MSC and MPC
Marginal external cost
cost experienced by a 3rd party when an additional unit of output is produced
Marginal social cost (the true cost)
MPC + MEC
How to prevent market failures
- private bargaining
- quantity regulation
- taxing polluters forces compensation for damages
Coasean bargaining
idea that private bargaining over external effects might be preferable to gov intervention
- parties have more info
Interpret MEC > P - MPC
cost to society is too high - reducing output would be a pareto improvement
Core rule for efficiency
MSC = MSB
Public good
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)
Negative externalities
Cause harm to others but don’t pay for it
- eg banana growers, noise, inadequate safety measures, deforestation etc
Positive externalities
Help others but don’t get paid for it
- eg vaccinations
In private bargaining, does it matter who has the property rights?
no, if bargaining works you get the efficient outcome either way
Obstacles to bargaining
- Impediments to collective action - different interests (types of fish), coalitions etc
- Missing or asymmetric info -
- Tradability and enforcement
- Limited funds
Pigouvian tax
A tax on something that causes negative externalities
- raises the private cost to match the social cost
Public good examples
defence, expert weather forecasting, radio, knowledge, street lighting, crime prevention etc
Public bad examples
- CO2, unpleasant smelling drains etc
Tragedy of the commons
- open access leads to overexploitation
What does asymmetric info lead to?
- 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 - 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
Adverse selection - ‘lemons’
- 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
When markets don’t exist
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
