Market Failure: Price Mechanism and Public Good Lecture Notes
Market Failure Overview
- Price Mechanism
- Public Goods
- Externalities
- Information Failure
- Factor Immobility
- Equity
- Government Failure
Central Problem of Economics
- Limited resources vs. unlimited wants
- Scarcity leads to choices:
- What to produce?
- How to produce?
- How much to produce?
- For whom to produce?
Price Mechanism Functions
- Signaling Function: prices signal shortages/surpluses.
- Incentive Function: prices motivate producers to adjust supply.
- Rationing Function: limited resources are allocated based on willingness to pay.
Effects of Price Changes
- Higher demand -> higher prices -> increased production.
- Lower demand -> lower prices -> decreased production.
Assumptions for Market Efficiency
- Decision-making based on self-interest.
- Perfect information, no externalities or market power.
Market Failure Causes
- Public Goods: non-rivalry, non-excludability, non-rejectability.
- Externalities: positive or negative effects on third parties.
- Information Failure: imperfect or asymmetric information.
- Factor Immobility: resources not easily reallocated.
Public Goods Characteristics
- Non-rivalry: consumption does not deplete availability (e.g., street lighting).
- Non-excludable: hard to prevent non-payers from benefiting.
- Non-rejectable: consumers cannot refuse consumption once provided.
Differences Between Public and Private Goods
- Public Goods: non-excludable, non-rivalrous.
- Private Goods: excludable, rivalrous.
Resolving Market Failure
- Government provision financed by taxes.
- Ensures maximum net social benefit but incurs opportunity costs.
Next Lecture Topics
- Price Mechanism
- Public Goods
- Externalities
- Information Failure
- Factor Immobility
- Equity
- Government Failure
- Decision-Making Framework