Market Failures and Remedies Flashcards
power
ability to do and get what we want in opposition to other’s intentions
bargaining power
extent of one’s advantage in securing a larger share of rents in an interaction
Pareto criterion
a desirable attribute of an allocation is that it is Pareto efficient
Pareto dominant
allocation A dominates B if at least one party would be better of with A than B, and nobody would be worse off
Pareto efficient
allocation where there is no alternative allocation in which at least one person would be better off, and nobody worse off
substantive judgements of fairness
based on the characteristics of the allocation itself
procedural judgments of fairness
based on how the allocation came about
how to find common ground on the question of values?
1) fairness applies to all people
2) veil of ignorance
3) from behind it, make a judgement
in the discourse on value, economics can clarify:
1) how unfairness dimensions may be connected
2) trade-offs between fairness dimensions
3) public policies to address these concerns
when do markets fail?
when prices do not capture significant effects - markets allocate resources in a Pareto inefficient way
social dilemma
when actions taken by individuals result in an outcome inferior to one that would result if they worked together
external effect
an effect of production that affects a third party in a way not specified in the contract
marginal private cost
cost of producing an additional unit of a good, not taking into account any costs its production imposes on others
marginal social cost
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)
transaction costs
costs that impede the bargaining process or agreement of a contract
reservation option
(fallback) person’s next best alternative in a transaction
practical obstacles to bargaining:
- impediments to collective action
- missing information
- tradability and enforcement
- limited funds
impediments to collective action
when there are many parties on both sides of the external effect, it is difficult to find a trusted representative
missing information
when it is difficult to come up with a solution, because it is hard to measure e.g. the pollution or damage done
tradability and enforcement
when the bargain involves the trading of property rights and the contract must be enforceable
Pigouvian tax
tax on activities that generate negative externalities to correct an inefficient market outcome
external benefit
positive external effect, not specified in the contract
missing market
where there is an exchange that would be mutually beneficial, but it does not occur due to asymmetric or non-verifiable information
asymmetric information
information relevant to the economic interaction, but known by some and not others
public good
use of which by a person does not reduce its availability to others
rival & excludable
private goods
rival & non-excludable
common-pool resources
non-rival & excludable
artificially scarce public goods
non-rival & non-excludable
non-excludable public goods and bads
moral hazard
problem of hidden actions, an insured person may engage in more risky behaviors
adverse selection
high risk people are more likely to get insurance, sometimes causing companies to drop out of the market in the end
principal-agent relationship
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
equity
an individual’s own investment in a project (net worth)
collateral
an asset that a borrower pledges to a lender as security for a loan
credit-constrained
people who are only able to borrow on unfavourable terms
credit-excluded
people who are unable to borrow on any terms
merit goods
goods and services that should be available to everyone, independently of their ability to pay
