Market Failures and Government Interventions

Social Efficiency

Resources allocated efficiently when MB equals MC.

-when all the benefits and costs are internalized, MSB = MSC

Market Failure

Inefficiency in resource allocation requiring government intervention.

Marginal Benefit (MB)

Additional benefit from consuming one more unit.

Marginal Cost (MC)

Additional cost of producing one more unit.

Socially Optimal Quantity?

the costs and benefits are internalized. Ess consumers get benefits and producers are the only ones who bear the cost.

What causes Market failuer?

1) market power

2) asymmetric information

3)private costs (neg/pos externalities)

4) insufficient production of public goods

Marginal Social Benefit (MSB)

Total benefit to society from consumption.

Marginal Social Cost (MSC)

Total cost to society from production.

Externalities

Costs or benefits affecting third parties not involved.

Negative Externalities

Costs imposed on others from production or consumption.

MSC increases, and then social output is less than equal.

MSC > MPC

Positive Externalities

Benefits received by others from production or consumption.

-some get benefits even if they pay nothing.

-in production: new tech, first aid, beekeeper making honey

MSB > MPB

Public Goods

Goods provided by the government for public use.

Deadweight Loss (DWL)

Loss of economic efficiency due to market distortions.

-caused by taxes and trade barriers, Price floors, price ceilings, asymmetric info, externalities, public goods

Asymmetric Information

Imbalance of information between buyers and sellers.

govt policy to eliminate market failure?

-taxes, subsidies, environmental regulations, property rights/reassignment of said rights, public provisions

Adverse Selection

Market failure due to lack of information.

pollution abatement?

the new tech applied by frims to the actions taken by the govt to reduce pollution

Tragedy of the Commons

Overconsumption of shared resources leads to depletion.

Coase Theorem

Private negotiations can resolve externalities without government.

-if you can internalize an externality, there is no govt. intervention via well-defined property rights and low/zero transaction costs

Rivalrous Goods

Consumption by one prevents consumption by another.

Excludable Goods

Non-payers can be prevented from accessing benefits.

Common Resources

Rivalrous and non-exclusive

Private goods

rivalrous and excludable

Pure Public Goods

non-rivalrous and non-excluadable

-leads to free-rider problem

club goods

non-rivalrous and excludable

Subsidies

Government payments to encourage production or consumption.

leads to MSB = MSC

Direct Provision of Public goods?

govt provides the military, weather watching, streetlights etc..

-other possible regulations include govt ownership, taxes, regulations, assigning prop rights

non-price regulations?

rules to ensure competition, eviron. protection, haleth and safety

ex: emissions standars, licesnsing, pollution cleanup, disclosure, OSHA, Consumer protection

Anti-trust Policy

Laws preventing monopolies and promoting competition.

Price Controls

Government-imposed limits on prices to protect consumers.

Market Structure

Characteristics defining the competitive environment of a market.

Elasticity

Responsiveness of quantity demanded or supplied to price changes.

income distribution

% of income that goes to different brackets

Gini coefficient

A/ A + B

Sources of income/wealth

-S and D markets

-MRP of worker

-Human Capital

-Social Capital/mobility

-inheritance

-access to financial markets

-discrimination

-bargaining power

policies to reduce inequality?

taxes and transfers

-minimum wage laws

-anti-poverty

-income protection

types of taxes and their effects?

Proportional - same % of income, no effect on distribution

Progressive - higher income = higher %, reduces inequality

Regressive - higher income = lower %, increases inequality

non-means tested?

if you meet criteria you are eligible

-medicare, SSS, Workers Comp

Means tested?

at or below poverty level

-medicaid, SNAP, SSI, Housing subsidy. etc