market failure Flashcards
market failure
when markets allocate resources in a pareto inefficient way.
externalities
when the cost/ benefit to society isn’t born by the producer or consumer
societal cost
not transmitted through the price (second hand smoke)
societal cost curve
actual cost is greater than reflected in the market equilibrium price
solutions to a market failure
- coase theorem
- pigouvian tax
- Regulation
coase theorem
the market will internalize externalities if we give property rights - actors can bargain with each other
problems with coase theorem
- assignment problem: who has property rights
- enforcement problem: weak state capacity or uncertain legal basis
- free rider problem: some actors will avoid paying their share
- transaction costs: its costly to gather info
pigouvian tax
tax on a good with external costs.- raising the price of the good to align with societal cost
limitations of peguvian tax
its hard to calculate societal cost.
regulation
legislating and limiting the quantity of a good produced.
regulation limitations
transaction costs in enforcement, might push people into more harmful substitutes
hidden action
moral hazard- creditor’s can’t observe the actions of their borrowers.
hidden attributes
leads to adverse selection- quality is known to one party
key insight about asymmetric information
when there’s asymmetric information, the market cannot produce an efficient equilibrium
solutions to asymmetric info problems
incentives to gather info (yelp), governments (insurance, credit rating agencies
