ecawns market failure 2

+ve ext

diagram for +ve ext

diagram for -ve ext

def for +ve ext

spillover benefits to third parties → not directly involved in con/prod of g/s itself

—> may be generated by prod/con in market

—> not internalise by c/p

MSB

MPB + MEB

underallocation

MSB > MPB

GOVT INT (3)

subsidies

rules and regulatios

direct and joint provision

govt int - subsidies - def

-on activities generating ext benefit on 3rd parties

-prod/con internalise +ve ext

1. govt provide subsidy to prod, decrease price to con

2. govt directly give con (CDC voucher)

govt int - subsidies- mechanism

1. granting subsidy = MEB at QS

2. decrease MPC

3. force con/prod to internalise MEB to third parties

4. decrease shift of MPC curve → mpc to mpc’

outcome:

1. new priv optimal qty Qp’ (MPB=MPC’)
   coincide with QS (MSB=MSC)

2. increase in con/prod, Qp to Qp’)

3. cause DWL to be eliminated

4. allocative eff

5. social welfare maximised

conc:

-subsidies incentivise prod and con

—> increase

—> internalise +ve ext in decision making

(prod: subsidise R&D)

govt considerations - limitations - subsidy (3)

1. info gap

   —> hard to attach monetary value to ext benefits (over/under est)

2. uncertainty and time lag

3. increase expenditure by govt, unsustainable in long term

govt considerations - unintended conseq - subsidy (2)

productive inefficiency in firms

(less incentive to stay efficient in long run, prod at lowest cost possible)

inequity

• increase producers profits due to lower unit cop

• increase unequal income distribution between con and prod

govt int - rules and reg (legislation)

1. enhance priv benefits of prod/cons

   (eg: enforcement of patents (copyright) —> yay innovation thru r&d, no risk of imitation)

2. firms ++ priv benefits from innovation

3. upward shift of MPB curve (MPB to MPB’)

4. MEB eliminated (other firms x benefit)

5. MPB’=MSB

outcome:

1. new priv optimal qty (MPB’=MPC) QP coincide with QS (MSB=MSC)

2. allocative efficient, social wf maximised, X market failure

   

govt consid - rules and reg (legislation) - limitations (2)

1. info gap

   —> in patent protection:

   regulations too tight — discourage companies to innovate, consumers no access to btr quality

   overly long — abuse market dominance, exploit consumere

2. high admin cost

govt consid - rules and reg (legislation) - intended conseq

1. law compel prod/con take actions

2. certain faster outcomes

direct and joint provision (def)

govt increase avail of goods that generate +ve ext in market —> be closer to social optimal lvl

direct provision

govt provide g/s —> producing + outsourcing production frm priv firm

outsourcing: govt pay for prod at lower cost

OBJ: maximise social welfare

joint provision

govt and profix maxx priv firms both provide g/s in market OR

involved in diff parts of the production of g/s

govt consid direct + joint - unint conseq (3)

improve affordability of essential good

—> govt provide necessities, reduce inequity

→ if left to priv firms, increase price charged, make lower ses left out

productive ineff by govt

—> absence of profit motive, lack of incentivee to keep cost low

—> complacency

—> govt x incentive to improve on its production and quality

productive and or dynamic inefficiency

—> lack of competition

—> complacent after winning contract, exclusive rights to prod g/s for specified time frame

—> increase cost than necessary incurred

—> lower in quality, lower consumer welfare

productive efficiency

g&s prod at lowest possible avg COP based on current tech

dynamic efficiency

improvement in quality/range

improvement production process, decrease COP over time due to innovation and investment in new technologies.

govt consid - direct joint - limitations (2)

info gap

political pressures

govt consid - direct joint prov - intended conseq

1. more certain outcomes

2. faster outcomea

govt consid - joint - +ve conseq

1. help boost production + meet higher demand

2. public-priv partnerships tap on expertise and experience of priv firms —> greater innovation in public sector