correcting market failures Flashcards
Pigou
tax the externality and shift the MC curve up by the same amount of the externality
this will eliminate the divergence between social and private costs
Coase
tax is not necessary
market will develop for the externality and an efficient point will be reached
property rights must be well defined
coase theorem
it does not matter who gets the rights, society will get tp the efficient point as long as rights are assigned and transaction costs are low
assignment of rights does impact the wealth position
wealth
more than just dollars, but well being
unanimity
economic state 1 is judged to be better than economic state 2 if each member of society individually judges state 1 to be superior to state 2
allows no dissent
used in courts in criminal cases
Pareto optimal
allocation such that no rearrangement of the allocation would benefit some economic agents without hurting at last one other economic agent
allows indifference
Pareto improvement
a change that makes at least one member of society better off and makes no member worse off
majority rule
economic state 1 is judged socially superior to economic state 2 if the majority of the members prefer state 1 to state 2
costly for every member so we elect representatives
potential Pareto optimal or improvement
states change should be undertaken if and only if the gainers from the change could (but not necessarily actually) fully compensate the loser from the project without themselves becoming the net losers
always applicable
based on potential and not actual compensation
coase optimal is a potential Pareto optimal
resolution for market failures
private negotiations - small number of parties, cheap
court actions:
- property rules - who has property rights, low number of parties
- liability rules - give out monetary
government intervention:
- market suasion
- directly produced environmental quality
- command and control
- economic incentives
