Unit 12 Flashcards
(26 cards)
Why do markets fail
Asymmetric info
Missing property rights
Incomplete contracts
External effects
Externality
Effect of economic decision that is not specified as benefits of liability in contract
MPC
MC cost to decision makers
MEC
Marginal external cost to society imposed by decision makers
MSC =
MPC + MEC
Negative externality =
MSC>MPC
Competitive profit max
Price (marginal revenue) = MPC
Social optimum
MSC = price
What could society do to reduce production
Pay firm compensation
What does bargaining acheive
Pareto effeicnet allocation regardless of who had property rights
Limits to bargaining / policies
Hard to enforce
Need representative to sort out deal
Hard to calculate exact cost of externality
Limited funds to compensate
With compensation when MR> MC + compensation what should firm do
Increase production
What should firm do when MR<MC + compensation
Decrease production
rival - excludable
Private good - food clothing
Rival non exludable
Common pool good
Non rival excludable
Club good - toll roads tv subs
Non rival and non excludable
Public good - nhs
Non rival good =
Use by one person does not reduce availability
MC for non rival
MC =0
Non excludable
Impossible form excluding anyone from access
What behaviour does non excludable
Free rider
How are private goods allocated
Markets
Asymmetric info
One party knows information that the other party doesn’t to relevant transaction
Moral hazard problem example
Being sacked bc employer doesn’t know level of employee effort
