W6 Flashcards
What is a market?
- an economic insitution that allows for the pursuing of private objectives to efficiently produce and allocate goods and services
- they have foundations resulting from social institutions and other social norms eg. laws guarantee property rights and the enforcement of contracts
- allows for many different individuals globally interact for mutual gain
Are markets pareto efficient?
Not necessarily pareto efficient or the best outcome
- there can be market failures
- asymmetric information - this is critical
What are the two things that market allow for?
specialisation and division of labour
- faster learning by doing
- greater economies of scale
What is a price signal?
prices can signal the scarcity - prices up- or excess - prices down of g/s in the market
- in competitive markets the price= marginal costs - which signals the cost to society of producing a good
What is the relationship between price and marginal costs?
In a competitive market price = marginal cost
but the price may fail to reflect the social marginal cost
- if there is a lack of competition P>MC
- if there are external effects P><SMC
i.e. positive or negative externalities
What are the sources of market failure
- incomplete contracts
- missing/incomplete/asymmetric information
- externalities/moral hazards/adverse selection
What is an external cost?
a negative effect of an economic decisision that is not accounted for in the contract
eg. the adverse effect of pesticide use by a banana plantation on the fishing industry on an island
In an externality situation what is the relationship between marginal social cost and marginal private costs?
MSC>MPC
you are producing more than the socially optimal quantity
What would a negative externality in PRODUCTION graph look like?
Supply and deamd curves etc.
Supply curve MSC>MPC - i.e further to the left
there would be a deadweight loss at the current quantitity produced - ABOVE the SMC line
MARKET QUANTITIY WOULD BE LARGER THAN IS SOCIALLY DESIRABLE
eg. pollution
What would a positive externality in CONSUMPTION look like?
Supply and deamd curves etc.
Supply curve MSC>MPC - i.e further to the left
there would be a deadweight loss at the current quantitity produced - BELOW the SMC line
MARKET QUANTITY IS SMALLER THAN SOCIALLY DESIREABLE
eg. renewable energy production
What is the marginal social cost made up of?
MSC= MPC+MEC
marginal social cost = marginal private costs + marginal external cost
What is the marginal social benefit made up of?
MSB= MPB+MEB
marginal social benifit = marginal private benefit + marginal external benefit
What relationship between marginal social cost and marginal social benefit creates a pareto efficient situation?
MSC= MSB
you can consume or increase a good as long as MSB>MSC
What is a private decision?
Decesisions that do not take into account external benefits or costs
What is a private market?
these are not always pareto efficient … MPC=/= MPB
Why might coasean bargaining not work?
- transaction costs = cost of acquiring information, enforcing a contract or collective action
- missing information = measurement in agg and for each party - origin of the pollutant
- readability and legal enforcement
- limited funds
-fairness - eg. polluter pays principle
What are the three possible solutions to this issue of externalities?
- regulation of the product to only produce the socially optimal amount
- Pigouvian tax - tax on firms generating negative external effects, in order to correct an inefficient market outcome
- enforcing compensation for affected parties - here the compensated party rather than the government that gets the payment eg. pay for clean transition
What is an example of a pigouvian tax?
eg. petrol tax - taxes drivers for the negative externality associated with driving petrol cars
What is the potential downfalls of a pigouvian tax?
the degree of harm is uncertain
the marginal costs are difficult to measure
government may favour powerful groups
What is a pigouvian tax?
a tax on firms generating negative external effects in order to correct an inefficient market outcome
MSB>MPB
the government takes part of the pie - the bit between the new price including the tax and the original price
the tax price is lower than the original price because the producers are receiving less for their products rather than more
What would a tax on producers look like in a demand curve?
Say the tax moves from the MPC to the MSC
the new point of equilibrium could be at the point where demand reaches that MPC
there would be a deadweight loss due to the shift in quantity produced
the surplus would go to the government - the different in the price square with the reduced quantity
What would happen if consumers were taxed?
Demand for the products would reduce and shift down - there would be a deadweight loss again and quantity produced would be reduced
Does it matter who or how you tax?
not in theory but in practice it might - people don’t like taxes
What are the risks associated with governments introducing regulation?
- costs may differ between firms and or different consumers
- political costs of being regulation-heavy government
but good if you want to just ban something outright like the LED lightbulb example
What are the risks associated with taxation?
- if the marginal private costs uncertain could end up taxes too heavily
- tax can internalise externalities only if transaction costs are sufficiently low – the cost of implementing the tax ie. lots of beurucracy
What is a contract?
sets out rights and duties for agent interacting in economic systems
of these agents could specify their respective rights and duties for all possible state of the world then their contracts would be complete
What is a missing market?
there is no market for external effects to be compensation
incomplete rights or missing or unenforceable = incomplete contract
What is the impact of assymmetric or unverifiable information?
for instance this could be the amount of damages from pollution or how much effort a worker puts in
- there can be no contract or property rights ensuring that the external effects are compensated
- some of the social costs or benefits of the decision makers actions are not included or not sufficiently important in the decision-making process
What is a public good?
if it is available to one person it is available to everyone at no additional costs
eg. a sunset = non-rival good
In terms of rival and exclusion : what is a private good?
private goods such as food
rival and excludable
In terms of rival and exclusion : what is a common -pool resource?
eg the commons or grazing land
rival
non-exlcudable
In terms of rival and exclusion: what is a public good?
eg. a view of the sea
non-rival
non-excludable
In terms of rival and exclusion : what is an artificially scarce public good?
eg. subscription TV
non-rival
excludable
What is the impact of non-excludable goods and the market?
difficult to have a functioning market for non-exlcudable goods
but you can artificially create a scarcity and therefore exclusion
What leads to p in- efficiency in terms of rival and exclusion?
non-rival and excludable goods lead to pareto-inefficient outcomes as
p> mc=0
what is a merit goods?
goods that should be available to everyone, independently of their ability to pay
eg. education
Tell me about hidden attributes?
some attributes of the person/prdouct involved in an exchange that is not known to the other parties
leads to adverse selection problem eg. insurance only v unhealthy people get a policy out
tell me about hidden actions?
actions of one party are not completely observable or knowabe by the interested party
moral hazard problem
eg. the interested party cannot control this through a contract - insurance policy and human health
What can lead to missing markets?
assymmetric information
What is the lemons and market relationship?
good products want a certain amount for their car
average price of the car is less than the Willing to sell price for good cars thus don’t sell
buyers don’t realise that this is what happening so they don’t make better offers and there is a market breakdown as the lemons are left as buyers slowly reduce their price
