Topic 5 Flashcards
when does market failure occur
when market fails to produce social optimum outcome
when does government failure occr
when gov fails to correct market failure or produces an inefficient outcome
what is the public interest view
it is the role of the government to prevent market failure and the negative consequences of rent seeking behaviour by monpolists, polluters and other
what is the private interest view
it is the role of the private market to prevent gov failure and negative consequences of rent seeking behaviour
what is rent seeking behaviour
when economic agents take advantage of being in a strong bargaining position to catch extra PS or CS which they would not otherwise have
define externalities
benefits or costs that effect someone that isn’t directly involved with the production or consumption of a g/s
what is the difference between price cost/benefit and social cost/benefit
private: costs and benefit borne by the individual/firm deciding to consume or produce a g/s
social: total cost/benefit by borne the whole society because of production or consumption of g/s
in terms of social and private b and c how is the standard market modeled
social cost = private cost
social benefit = private benefit
how are externalities modelled
social cost =/= private cost (2 MC curves)
social benefit =/= private benefit
what is a positive externality and why does DWL occur (draw model)
social benefits of consumption or production are greater than the private benefit (MSB > MPB)
DWL for each unit of production = the difference between MSB and MSC. Total DWL for all units UNDER PRODUCED is the sum of the differences for each unit.
what is a negative externality and why does DWL occur (draw model)
when the social cost of consumption or production is greater than the private cost (MSC > MPC)
DWL for each unit of over production = the difference between MSC and MSB. Total DWl for all units overproduced is the sum of the differences for each unit.
what are the 4 ways externalities can be rectified
- self correction
- command and control (prohibition/compulsory)
- Price and Quantity Controls (quotas and licenses)
- Taxes and Subsidies (internalise the externality but can lead to shortage/surplus)
- Instating Property Rights (creating markets where there were non - pollution permits)
what are the issues with each way of correcting externalities
Command and Control: pos ext may have costs and neg ext may have benefits.
Price Control: can lead to shortage/surplus
Quantity Control: only work if Q is too high and can create shortage
how can self correction of externalities occur (what is the coase theorem)
stakeholders and consumers can choose to boycott/pressure firm by not buying that product
coase: if things are easily done (low transaction cost), private bargaining will result in an efficient solution to the problem of externalities
define rivalry and excludability
rivalry: when one person’s consumption of a unit of good means no one else can consume it
excludability: anyone who does not pay for a good cannot consume it
define each type of good and give an example
private (R +E) - food
club (E + NR) - netflix
common resources (NE + R) - ocean fish
public (NE + NR) - parks
in relation to pyblic goods what is the free rider problem and how does this create market failure
if i can consume this without paying for it, then i wont
no profit incentive to produce so gov must step in to prduce through surveys and cost benefit analysis
in relation to common resources what is the tragedy of the common and how does this create market failure
although available to all people, it will eventually run out and no individual is interested in withholding their use of the resource so requires regulation
how can the tragedy of the commons be solved
private property ownership
discussion between players
gov can tax or set quotes/issue permits (fishing)
how can a subsidy and a tax rectify externalities (draw graph)
subsidy - increases quantity so rectifies pos ext
tax - decreases quantity so rectifies neg ext
how are producers effect by direct implementation of a subsidy or tax
- subsidy directly to producer = fall in marginal private cost
- tax directly on producer = rise in marginal private cost
how are consumers affected by directly implementation of a subsidy and a tax
- subsidy directly given to consumer = movement down the MPB curve (fall in price)
- tax directly on consumers = movement up the MPB curve (rise in price)
in the secondary market explain the tradability of permits (for pollution)
when demand is high, price increases so there is a higher likeliness to sell. Those who have few alternatives but to pollute will have higher willingness to pay. Those who have more alternatives can be easily induced to sell permits.
