Market Failure & Equity And Efficiency Flashcards
Efficiency occurs…
Perfectly competitive market: MR=MC
4 Types of Market Failures
- Monopoly
- Public Good
- Externalities
- Asymmetric Information (Moral Hazard and Adverse Selection)
Public Good
1.Non-excludability
2.Non-rivalrous
3. Consumption doesn’t affect another person
FREERIDER problem
- Can’t exclude people from using your product
- Can’t produce the optimal amount
- Can’t have optimal provision of the item/service
Monopoly produce where…
MR=MC
P>MC
P=Price: value of the resources used in this market
MC=Marginal Cost: value of the sources used elsewhere
Monopoly
Private Good
- Rivalarous
- Excludable
Common property
- Non-excludable
- Rivalrous
- Consumption by one consumer or a group of consumers reduces the amount available for others
Congestive public good
Public good for which the degree of non-rivalry depends on the volume of users
Externalities
Occur when one person’s actions affect another person’s wellbeing
How to solve externality problems?
- Charge tax that equals the difference between the SMC and MC for negative externalities. The inverse would be for positive externalities
- Property rights
How do you solve a public goods problem?
The government pay for it (because people will always life)
Moral Hazard occurs…
when an action is taken by someone unknown
Adverse selection occurs…
When you do not have info on an individuals predetermined type
Moral Hazard: an ____________ ________; ___________ _________
Unobserved decision; hidden action
Adverse selection: an __________ _________; __________ _______
Unobserved characteristic; no choice is being made
Example of a Moral Hazard
Used Cars (you don’t observe their choice of maintenance, how they drove the car, etc…)
An example of Adverse Selection
Lemon Car - car with problems off the production line (Seller knows about it, but they didn’t do anything to the car (to make it a lemon car))
How to get around the asymmetric information problem
- Stock options (Moral hazard)
- Warranty (Adverse selection)
- Deductible (Moral hazard)
Why should we care about asymmetric information?
The person the possesses private information is held to higher standard
Allocative efficiency
MC=MB
The value of using those resources in the market = the cost of using those resources in the market
Production Efficiency
Price = Minimum of the long run average cost curve (the firms most efficiency low cost technology) (Production)
Pareto Efficiency/Pareto Optimality occurs…
Where you have both allocative and productive efficiency
Kalder efficiency is when…
Gainers must gain more than the losers lose, but they don’t have to compensate
Kalder efficiency is easier because…
It’s less costly and timely, and you don’t need to compensate others
Kalder efficency is hard because…
It’s hard to find policy that never actually hurts somebody
Efficiency
when all goods and factors of production in an economy are distributed or allocated to their most valuable uses and waste is eliminated or minimized
Equity
distribution of income among individuals; fairness (MAYBE NOT THE DEFINITION LOOKED FOR THOUGH)
Efficiency
relationship between the aggregate benefits of a situation and the aggregate costs of the situation; when all goods and factors of production in an economy are distributed or allocated to their most valuable uses and waste is eliminated or minimized
Negative Externality
SMC=MB
Positive Externality
MC=SMB
