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)

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