Market Failure Flashcards
Week 11
1
Q
Why do we use Perfect Competition?
A
- The market is ‘Allocatively Efficient’- Everyone is as well off as possible
- MB for consumers = MC for producers
- Producer Surplus: P-MC
- Consumer Surplus: MB-P
2
Q
What are the 4 most detrimental Inefficiencies in Markets?
A
- Lack of Competition
- Externalities
- Common Goods
- Public Goods
3
Q
Why is the Lack of Competition inefficient?
A
- Monopolies produce at MR=MC to profit maximise
- At this lower quantity, MB>MC, hence a DWL to society is produced
- CMA monitor the DWL to ensure that it is not too large
4
Q
Why are Externalities inefficient?
A
- If there is a Negative externality, it is on production side and a deadweight loss is produced (PMC>SMC)
- If there is a Positive externality, it is on consumption side and a deadweight loss is produced (PMB<SMB)
5
Q
What is a Pigouvian Approach?
A
- Pigouvian taxes/subsidies must be equal to the External Costs/Benefits
- This can be tough to know, and surveys help- but cannot tell you exactly
- This can create inefficiencies
6
Q
What is a Coasian Approach?
A
- Coase Theory; By letting a costless negotiation between parties, an efficient outcome can result
- Coase believes that the market can sort everything out
- However, Property Rights must be assigned and the Legal system must work costlessly
7
Q
Why are Common Goods inefficient?
A
- Tragedy of the Commons; where no one owns a common resource hence this resource gets depleted and used up
- Solutions to this are Tradable Permits, Community Enforcement, Property Rights, Licensing, Customs
8
Q
Why are Public Goods inefficient?
A
- Both Non-excludability are Non-rivalrous
- Examples include National Security, NHS, Street Lighting
- As it is not diminishing and you cannot stop people for enjoying it- people do not pay for it and the ‘Free Rider’ Problem occurs
- To prevent this, you will need social planners or Government; to calculate SMB and work out MC of a product
