Market failures: Externalities, monopolies etc. Flashcards
Explain this:
What can be said about this:
What does Internalizing the externality mean?
Altering incentives so that people take account of the external effects of their actions
- When market participants must pay social costs, market equilibrium = social optimum
What is included in positive externalities? (in other words, what is the social value)
private value + external benefit
Explain
how to increase goods with posive externalities
subsidize goods with positive externalities
What are the two approaches within Public Policies toward Externalities?
1) Command and control policies: Regulate behavior directly
- Limits on quantity
- requirements that firms adopt a particular technology (to reduce emissions for instance)
2) Market-based policies: Provide incentives to private decision-makers - Corrective taxes and subsidies (also called: Pigouvian taxes)
- tradable pullution permits
is regulation or corrective taxes best at decreasing polution?
taxes are best: gives incentives to adopt cleaner technology, also below the level that would be specified in the regulation sitation
- But tradable polution permits work same way
What is the Coase theorem?
if private parties can costlessly bargain over the allocation of resources, they can solve the externalities problem on their own
–> E.g. One can pay the other to change the value function
But why do private solutions not always work? (against the Coase theorem)
1) Transactions costs: costs of the process of agreement
2) Stubbornness: each party might hold out for a better deal
3) Coordination problems: especially if number og parties is very large
What are the two dimensions and four categories, when it comes to the characteristics of goods?
(Hint: one is public good)
dimensions: excludability and rivalry
types: private goods, public goods, common ressources and club goods
What are the characteristics of perfect competition?
1) many buyers and sellers
2) The goods offered for sale are largely the same
3) firms can freely enter or exit the market
1) What is a monopoly?
2) What is the biggest difference to a competitive firm?
1) Sole seller of a product without close substitutes
2) Has market power - ability to influence the market price
What is the main cause of monopolies?
Barriers to entry
What are the three courses of barriers to entry?
1) A single firm owns a key resource
2) the government gives a company the exclusive right to produce a good
3) Natural monopoly: A single firm can produce the entire market Q at a lower cost than could several firms
How does the demand curve look for the individual firm in competitive markets and monopolies?
in competitive markets, the demand curve is horizontal as firms can increase Q without changing P.
The monopoly is the only seller, and thereby the entire market, accordingly, to sell a higher Q, it must reduce P.
What is the welfare cost of monopoly?
