ch 4 (market failures)

demand-side failure

demand curve doesn’t show consumers full willingness to pay for g/s (caused by pos externalities)

supply-side failure

supply curve doesn’t show full cost of production; caused by negative externalities

efficiency conditions

• demand curve has to show consume willingness to pay

• supply curve has to show full cost of production

• basically need accurate curves to accurately predict EQ (where MB=MC)

consumer surplus

• willing - actual price

• willing price depends on opportunity costs of alternatives

producer surplus

• actual price (profit) - min. willingness to sell

• min acceptable price = opportunity cost of taking resources away from other products

relationship between equilibrium price and producer surplus

equillibrium price proportional to amt of producer surplus

consumer surplus and price relation

consumer surplus inversely related to price

EQ has

productive efficiency (min. per unit cost bc of competition) and allocative efficiency (correct quantity produced relative to other g/s)

allocative efficiency conditions

• MB = MC

• max willingness to pay = min acceptable price

• maximized total surplus

deadweight loss

reduced surplus caused by externalities

private goods

• rivalry (only 1 person can eat fry)

• excludability (only ppl willing to pay market price get fry)

• mitigates over/underproduction bc of market adjusts

public goods

• nonrivalry (everyone benefits at same time)

• nonexcludability (can’t stop ppl from benefitting from good)

free-rider issue

ppl willing to pay for good but producers can’t withhold good or charge for it

price-quantity curve

shows how much someone is willing to pay PER additional unit

• neg slope for demand bc dim marginal utiltiy

• pos slope for supply bc increasing marginal costs

cost-benefit analysis

• helps gov decide how much to pursue public goods (bc it takes resources away from private goods)

quasi public goods

g/s produced and delivered so that exclusion and rivalry is partially possible; impure public good

• reallocating resources from private to public requires tax to reduce income thus demand

externality

cost/benefit spills over to 3rd party

neg externality

overproduction + allocation, underestimate supply curve

pos externality

underproduction + allocation; underestimates demand curve)

ways to mitigate neg externalities

• private bargaining

• liability/lawsuits

• producer tax

• direct control

• market for externability rights

• reducing demand (marketing campaigns)

ways to mitigate positive externalities

• private bargaining

• consumer or supplier subsidies

• gov provisions (free stuff)

• increasing demand (marketing campaign)

gov intervention methods

• direct control (e.g. legislation limits)

• specific taxes (affects input costs)

• subsidies + gov provision: affects demand/supply curves

optimal externability reduction

• reduction is subject to a price that has diminishing returns

• optimal reduction happens at MB = MC

what justifies gov intervention?

market failures

what is a gov failure

economically inefficient outcomes caused by politics causing problems

[msc] and [msb] for

corrected externalities

[mpc] and [mpb]

for non touched/corrected externalities

cant get producer or consumer surplus

from units that aren’t sold (mc > mb)