lecture 9 - markets, efficiency and public policy Flashcards
what are some of the causes of market failure?
external affects, asymmetrical information, lack of competition and incomplete contracts
what are the solutions to markets failure?
taxes/subsidies, property rights dn information sharing
what is an external effect/externality?
when somebody engages on an activity that imposes a cost on somebody else buy does not pay for the cost
what is a negative external cost?
negative effect of an economic decision that is not specified in the contract
e.g clean up o pollution
what can help market function and avoid negative externalises?
laws and legal tradition
what is market failure also known as and why?
pareto inefficient
if there are negative externalities then that is making someone (3rd party) worst off whilst benefitting omsoene else
what is marginal private cost?
cost for producing 1 additional unit minus the cost imposed on others
what is the marginal social cost?
cost of producing one additional unit, including marginal private cost and marginal external cost (costs imposed on others affected)
what is coasian bargaining?
private bargaining between parties may produce pareto efficiency (regardless of property rights)
why cant coasian bargaining address market failure alone ?
- missing info
- limited funds
- enforcement
- impediments to collective action
what are transaction costs?
costs of acquiring information, enforcing contract and collective action
makes coasian bargaining infeasible
other than coasian bargainig how else can negative externalities be reduced?
governments can try to reduce them through regulation of production, taxation and enforcing compensation
how can governments try to regulate production
cap the quantity to a social optimal amount
what is the specific tax that governments can use to stop market failure?
pigouvian tax
what is pigouvian tax?
a tax on activities that generates negative externalities
