UNIT 2- Environmental economics Flashcards
Consumer surplus
is the amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it.
Producer surplus
is the amount a producer is paid minus the cost of production.
First theorem of welfare:
“Any market equilibrium is Pareto efficient”
- A Pareto optimum is a situation in which there’s no possible trade of goods that can improve
someone’s welfare without decreasing the welfare of another agent. - For this theorem to be true, markets should comply with the requisites of a perfect competition.
Second theorem of welfare:
“Any Pareto efficient situation can be reached reassigning the wealth of the agents”
- This second theorem means that the way to intervene in an economy to win equity is not to fix prices or quantities of goods produced, but to redistribute income available to agents.
Market failures:
- insufficient competition
- public goods or common resources
- externalities
- incomplete markets
- asymmetric information
Market failures- insufficient competition:
A monopoly /oligopoly will appear
A natural monopoly
- Sometimes, the nature of the good produced implies that the most efficient option is to have only one supplier.
- For example, it will be not efficient that many companies provide drinking water supply (each of them will need its own water treatment and piping systems).
- Many environmental goods are related to natural monopolies.
Market failures- public goods or common resources
- There are some goods whose intrinsic characteristics make them impossible to be efficiently allocated by the market.
- That is due mainly to the impossibility of excluding anyone from its consumption, which makes it impossible to ask a price for them. Public goods and common resources share this characteristic.
Market failures- externalities
- A situation in which the actions of one agents has an affect on another agent and this effect is not compensated → example: pollution
- are usually negative effects, but can also be positive
- property rights are not correctly defined
Unfulfilled perfect competition requirements for market failures:
1) Insufficient competition - many buyers and sellers, agents cannot influence prices, goods are homogeneous
2) Public goods or common resources- property rights are correctly defined
3) Externalities- property rights are correctly defined
4) Incomplete markets- information is perfect
5) Asymmetric information- information is perfect
Market failure- incomplete markets
In some cases, producers don’t offer a certain product or service, even though consumers are willing to pay for it a price higher than its cost. In these cases we have an incomplete market. Some examples of incomplete markets are:
* Insurance markets (especially health insurance).
* Capital markets.
- One of the reasons of the existence of incomplete markets is imperfect information. Insurance companies, for instance, have less information about the risks of a costumer than the costumer
himself.
Market failure- asymmetric information
- Consumers and producers having different information may affect the correct functioning of markets.
- This situation is usually a consequence of the complexity of certain products, which prevents the costumer from knowing all their characteristics.
—> Actually, the producer may want to hide some of the product characteristics (e.g.: the ingredients of some foods or the working conditions of those who produced the good).
Induced demand good
Happens when the producer is the only one that knows what the consumer needs
Examples: Dentists – have to trust the dentist, don’t know anything about it → can sell u the most expensive option without u knowing you don’t need it
Government intervention in the markets - income redistribution
The government may intervene in the economy even in situations in which there are not market failures.
- A resource allocation being efficient does not say anything about wealth distribution: an allocation can be
Pareto-efficient but let some people without the means to survive.
—> Governments try to mitigate these situations redistributing income through taxes and subsidies.
—> These measures (taxes and subsidies) distort markets, and should therefore be studied through a cost- benefit analysis.
—> Environmental taxes are a good example of this need.
Government intervention in the markets- merit goods
Sometimes governments decide to intervene in a market because they fear consumers are not taking correct decisions.
- One example of these situations is the imposition of the consumption of some merit goods.
–> Merit goods are those offered by the markets, but consumed in quantities smaller than the optimum, as a consequence
of the lack of information about their benefits.
–> In that sense, merit goods can be seen as a market failure created by imperfect information.
–> Education, health services, insurances and retirement pensions are examples of merit goods.
