Unit 6 - Market Failure and the Role of Government Guide

Socially efficiency is when resources are allocated effectively
MSB=MSC !!
Allocatively Efficient Points
  * Perfectly competitive market : S=D, MB=MC
  * Perfectly competitive firm : P=MC
  * Perfectly competitive labor market : W=MRP (total economic surplus : MSC=MSB)
Causes of Market Failure
  * Market power (imperfectly competitive markets)
  * Asymmetric information (lack of info provided by buyers and sellers)
  * Positive and negative externalities
  * Insufficient production of public goods
Government policies used to get rid of DWL
  * Taxes
  * Subsidies
  * Reguations
  * Public prodivions
Market failure : exists when firms produce @ MPC=MPC, S=D
The government tries to get them to produce @ MSC =MSB

Externality : when external cost/benefit is placed on members of society who did not pay for them
MSB does not equal MSC
Negative externality : when someone uses a product, it decreases the benefit of others (ex. smoking), MSC > MPC (correct with per unit tax)

Positive externality : when one uses a product, others benefit (ex. education) MSC < MPC (correct with subsidy)

Rivalrous good : if someone consumers a product, others cannot
  * Rivalrous : food, shoes, etc
  * Nonrivalrous : national defense, fireworks, etc
  * Somewhere in middle : schools, roads, etc
Excludable good : non payers can be prevented from enjoying the benefits
* Excludable : food, school, etc
* Nonexcludable : national defense, air, etc
Public goods : underproduced due to freeloader problem
Examples : national defense, law enforcement, etc
Freeloader problem : people can enjoy the benefit of a good/service without paying
Government will provide subsidies to producers
Private goods : goods produced by private markets, can be excludable

Causes of inefficient markets
  * Market power
  * Externalities
  * Nonrival and nonexcludable goods (public goods)
Forms of government intervention
  * Taxes
  * Subsidies
  * Price floors/ceilings
  * Regulation
Per unit subsidy : gives benefits per unit
* Perfect competition : MC, ATC, AVC decreases, price doesn’t change (price taker)
* Monopolistic competition : MC, ATC, price decreases (price maker @ MR=MC)
Lump sum subsidy : gives benefit no matter how many units
Taxes will always shift supply curve to the left in long run, profits decrease
Per unit tax : increase MC, ATC, and AVC
* Perfect competition : MC, ATC, AVC increases, price doesn’t change (price taker)
* Monopolistic competition : MC, ATC, price increases (price maker @ MR=MC)
Lump sum tax : only increase ATC
won’t change output level

Non price regulation : works like taxes, they ensure competition/environmental protection/health and safety
Antitrust policy : promote competition and prevents monopolies
Antitrust laws
  * Lawsuits
  * Price controls
  * Subsidies
Price ceiling : sets minimum price
* Perfect competition : causes shortage
* Monopolistic competition : becomes MR curve, price and output decreases
Price floor : sets maximum price
* Perfect competition : leads to surplus
* Monopsony : wages go up and workers go up

Income distribution : measures % of income that goes to individuals in different percentiles/brackets
In a system with perfectly equality : everyone would receive equal shares of income
Income : wages, rent, interest, profit
Lorenz curve : measures the distribution of income equality (you want to be as close of possible to the perfect equality line as possible)

@@Gini coefficient@@ : A/(A+B)
* Closer to 0, more equality
* Closer to 1, the more inequality
@@Causes of income inequality@@
  * Supply + demand in labor market
  * Human capital
  * Discrimination
  * Inheritance
  * Bargaining power
  * Etc
@@Policies to address inequality@@
  * Taxes + transfers
  * Minimum wage laws
  * Anti-poverty program
  * Income protection program
  * Scholarships
@@Taxes :@@
  * Proportional : everyone pays the same percentage of their income (no impact on income distribution)
  * Progressive : taxes are higher % on people earning a higher income (reduces income inequality)
  * Regressive : taxes are lower % on people earning a higher income (increases income inequality)

\
\