Market Failures and Remedies

Question 1

power

Answer 1

ability to do and get what we want in opposition to other’s intentions

Question 2

bargaining power

Answer 2

extent of one’s advantage in securing a larger share of rents in an interaction

Question 3

Pareto criterion

Answer 3

a desirable attribute of an allocation is that it is Pareto efficient

Question 4

Pareto dominant

Answer 4

allocation A dominates B if at least one party would be better of with A than B, and nobody would be worse off

Question 5

Pareto efficient

Answer 5

allocation where there is no alternative allocation in which at least one person would be better off, and nobody worse off

Question 6

substantive judgements of fairness

Answer 6

based on the characteristics of the allocation itself

Question 7

procedural judgments of fairness

Answer 7

based on how the allocation came about

Question 8

how to find common ground on the question of values?

Answer 8

1) fairness applies to all people
2) veil of ignorance
3) from behind it, make a judgement

Question 9

in the discourse on value, economics can clarify:

Answer 9

1) how unfairness dimensions may be connected
2) trade-offs between fairness dimensions
3) public policies to address these concerns

Question 10

when do markets fail?

Answer 10

when prices do not capture significant effects - markets allocate resources in a Pareto inefficient way

Question 11

social dilemma

Answer 11

when actions taken by individuals result in an outcome inferior to one that would result if they worked together

Question 12

external effect

Answer 12

an effect of production that affects a third party in a way not specified in the contract

Question 13

marginal private cost

Answer 13

cost of producing an additional unit of a good, not taking into account any costs its production imposes on others

Question 14

marginal social cost

Answer 14

cost of producing an additional unit of a good, taking into account both the cost for the producer and the costs incurred by others affected by the good’s production ( MPC + MEC)

Question 15

transaction costs

Answer 15

costs that impede the bargaining process or agreement of a contract

Question 16

reservation option

Answer 16

(fallback) person’s next best alternative in a transaction

Question 17

practical obstacles to bargaining:

Answer 17

• impediments to collective action
• missing information
• tradability and enforcement
• limited funds

Question 18

impediments to collective action

Answer 18

when there are many parties on both sides of the external effect, it is difficult to find a trusted representative

Question 19

missing information

Answer 19

when it is difficult to come up with a solution, because it is hard to measure e.g. the pollution or damage done

Question 20

tradability and enforcement

Answer 20

when the bargain involves the trading of property rights and the contract must be enforceable

Question 21

Pigouvian tax

Answer 21

tax on activities that generate negative externalities to correct an inefficient market outcome

Question 22

external benefit

Answer 22

positive external effect, not specified in the contract

Question 23

missing market

Answer 23

where there is an exchange that would be mutually beneficial, but it does not occur due to asymmetric or non-verifiable information

Question 24

asymmetric information

Answer 24

information relevant to the economic interaction, but known by some and not others

Question 25

public good

Answer 25

use of which by a person does not reduce its availability to others

Question 26

rival & excludable

Answer 26

private goods

Question 27

rival & non-excludable

Answer 27

common-pool resources

Question 28

non-rival & excludable

Answer 28

artificially scarce public goods

Question 29

non-rival & non-excludable

Answer 29

non-excludable public goods and bads

Question 30

moral hazard

Answer 30

problem of hidden actions, an insured person may engage in more risky behaviors

Question 31

adverse selection

Answer 31

high risk people are more likely to get insurance, sometimes causing companies to drop out of the market in the end

Question 32

principal-agent relationship

Answer 32

exists when one party (P) would like another party (A) to act in some way etc., but that cannot be enforced or guaranteed in a contract

Question 33

equity

Answer 33

an individual’s own investment in a project (net worth)

Question 34

collateral

Answer 34

an asset that a borrower pledges to a lender as security for a loan

Question 35

credit-constrained

Answer 35

people who are only able to borrow on unfavourable terms

Question 36

credit-excluded

Answer 36

people who are unable to borrow on any terms

Question 37

merit goods

Answer 37

goods and services that should be available to everyone, independently of their ability to pay