DK

Unit 6 - Market Failure and the Role of Government Guide

[[6.1 Socially Efficient and Inefficient Market Outcomes[[

  • 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

[[6.2: Externalities[[

  • 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)

[[6.3: Public and Private Goods[[

  • 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

[[6.4: The Effects of Government Intervention in Different Market Structures[[

  • 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

[[6.5: Inequality[[

  • 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)