market failures
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Market Failures. Frederick University 2014. Questions What and how much How For Whom. Problems Efficiency in allocation Efficiency in motivation Efficiency in distribution. Main Economic problems. Market Functions. Achieve: Efficiency in allocation Efficiency in motivation - PowerPoint PPT PresentationTRANSCRIPT
Market Failures
Frederick University
2014
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
Public goods I won’t use it andI am not gonna pay for it!
Public Goods – goods, which are nonrival and nonexcludable in consumption
Externalities
A chemical companywould like to build a plant here
What about our rivers?
We’ll make them any color
you want
Externalities
Externalities – cases where social costs and benefits differ from private costs and benefits
P
Q
D
S – private cost
q1
p1
Social cost
qs
ps
Merit goods Merit goods – goods,
whose utility consumers tend to underestimate
P
Q
D
S
q1
P1
subsidy
q2
p2
P3
Demerit goods
Demerit goods – goods whose utility consumers tend to overestimate
P
Q
D
Stax
q1
p1
q2
p2
Asymmetric Information
Racing? Let me justget 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
Q
AC
AC
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
Instability
Unstable macroeconomic equilibrium, creating cyclical fluctuations in employment and price level
The Role of Government
Musgrave’s Three Branches stabilization allocation distribution
The government failureOf course you may registera complaint about all the government paperwork, sir, ...But it has to be in writing.