Chapter 3 Flashcards
market power
the ability to influence market outcomes
rational agent
all market participants – producers are profit-maximizing and consumers are utility maximizing
externality
when costs or benefits of a good are not internalized in the transaction and price
economic rents
excess profits
market barrier
inability for buyers and/or sellers to freely enter/exit the market. example: costly start up or shut down charges.
market barriers alter the market power or marginal behavior of actors in the marketplace
market failure
(1) internal market structure problems - no free entry/exit
(2) external market scope - markets fail to include all of the effects of the participants’ behavior within them or fail to include all participants that are involved in the use/allocation of resources within market
(3) information - costly or unavailable to all market participants (principal agent problem)
(4) market design problems introduced by govt policy and regulation
natural monopoly
occurs in industries or service providers for which it is only economically efficient to have a single provider who continues to achieve cost improvements through scale (which results in a falling average cost)
cartel
restrict aggregate output across producers so that market prices go up (rent-seeking monopoly behavior).
dumping
of goods, when a firm enjoys a cost or protected market advantage in their home country and can sell it below market prices (or even at a loss) in another marking, eventually driving out competition in that market
global commons
commonly owned resources – land, materials, minerals, international fisheries
free-rider problem
both paying and non-paying customer will use (and degrade) public goods & the revenues generated are insufficient to induce a profit-seeking firm to participate
typical soln = for govt to provide these services and collect cost of doing so through taxes
public goods problem that producers are rarely interested in providing public G&S b/c they can’t fully recover cost of delivering them.
informational asymmetry
lack of transparency or costs to obtain info impacts the efficiency of market performance
principal-agent problem
an information asymmetry problem that has to do w/ relationship b/w principal and agent.
Arises when Agent (decision-maker) is acting on behalf of the person who has to bear the consequences of that decision (Principal). Agent typically has different set of info and many options from which to choose. P can’t control/monitor all choices made by A.
adverse selection
arises when there’s a different of info b/w buyers and sellers wrt quality of good being transacted
Example: insurance. Those who are not healthy are most interested in getting health insurance. Pool would only = unhealthy. In turn, claims would be higher than expected and rate would rise. Spiral…
Signaling (sellers make commitments to convince buyers) and screening (buyer elicits info to reveal seller info more credibly)
moral hazard
after rel. b/w buyers and sellers is established
even if contractual relationship is established soundly, one party can change behavior after the relationship is established
(e.g. someone w/ insurance policy may then engage in more risky behaviors)
