Market Failures Frederick University 2008 Main Economic problems

Market Failures Frederick University 2008 Main Economic problems

Market Failures Frederick University 2008 Main Economic problems Questions What and how much How

For Whom Problems Efficiency in allocation Efficiency in motivation Efficiency in distribution Market Functions Achieve:

Efficiency in allocation Efficiency in motivation Efficiency in distribution Market failures Market failures are all cases when markets fail to perform their functions - functional market failures, or markets perform their functions, but the outcomes do not fit the system of social values - social market failures

I wont use it and I am not gonna pay for it! Public goods Public Goods goods, which are nonrival and nonexcludable in consumption Externalities A chemical Well make company them any color would like to build you want

a plant here What about our rivers? Externalities Externalities cases where social costs and benefits differ from private costs and benefits Social cost P D S private cost

ps p1 qs q1 Q P P3 S

Merit goods Merit goods goods, whose utility consumers tend to underestimate subsidy D P1 p2 q1 q2

Q Demerit goods Demerit goods goods whose utility consumers tend to overestimate P D p2 tax

S p1 q2 q1 Q Asymmetric Information Racing? Let me just get my car insurance!!!

Incomplete Markets Bounded rationality Moral hazard and adverse selection Monopoly vs. Pure Monopoly

Monopoly an ability to produce a good or a service that others are not able or allowed to. Pure monopoly a market structure, determined by only one producer of a good with no close substitutes Natural Monopoly

Natural monopoly a monopoly position, determined by factors, which cannot be replicated Types of natural monopoly: Monopoly, created by a possession of resources, inaccessible to competitors Monopoly, justified by economies of scale Local monopoly Economies of Scale

P AC AC Q Institutional Monopoly

Institutional monopoly a monopoly, deliberately created by economic decision makers Types of institutional monopoly: Monopoly, created by a collusion, or a merger Monopoly, created by institutional barriers to entry to the industry Government monopoly

Monopoly Pricing P MC D P AC Qm Q MR

Pure Monopoly and Perfect competition Consumer surplus = (P P N R MWP) MC Under perfect competition = Producer surplus =

KLN Under pure monopoly = NRT (P-MC) AC Under pure monopoly the produc surplus rises by KGTR at the exp of the consumer surplus T Pm Pp.c.K G L

J MR O Qm Qp.c. GTL the portion of the consumer surplus,

which is a deadweight AR for D loss the society JGL the portion of the producer surplus,Qwhich is a Instability

Unstable macroeconomic equilibrium, creating cyclical fluctuations in employment and price level The Role of Government Musgraves Three Branches stabilization allocation distribution

The government failure Of course you may register a complaint about all the government paperwork, sir, ... But it has to be in writing.

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