Week 4- Market Failure Flashcards
Demand curve = the marginal willingness to pay OR…
marginal private benefit (MPB) if consumption
Maringal social benefit (MSB)
- the benefit of all society gets from consumption of a good
MSB = MPB +
other benefits not accounted for by private consumers of the good
MSB of street trees
- shade, noise reduction, carbon sequestration, aesthetic.
- far outweighs MPB (as home owner needs to buy and care for the tree and likely can’t be bothered.
MSC = MPC +
other costs not accounted for by producers
Marginal private cost (MPC)
firm’s supply curve
Draw: land clearing example
- MSC curve is higher than MPC curve
- if left to their own devices, farmers would clear Q1 hectares of vegetation (MPC intersect)
- but to consider higher social costs, farmers would need to reduce amount of land cleared (MSC intersect Q*)
- Deadweight loss associated with over clearing as it costs society more than the benefits of more beef production
Market Faulure occurs when…
- the market does not allocate resources efficiently
- When MPB ≠ MSB
or MPC ≠ MSC - Fre market will allocate resource such that the quantity of final output does not lead to maximum benefit for society.
6 categories of market failure
- imperfect competition
- imperfect information
- inappropriate government intervention
- absence of clearly defined and enforceable property rights
- public goods
- externalities (benefits and costs incurred external to the market - street trees and land clearing examples)
Draw: Deadweight loss with imperfect competition
- competitive industry quantity: were MSB inelastic demand meets MPC/MSC (supply)
- monopolist industry quantity: where supply meets MR
- monopolist: less quantity sold at greater price.
- deadweight loss between the two prices
imperfect competition e.g
- oligopolies in oil
- BeBeers, South African diamond company
- USA pharmical industry: make new drug: patent for 20 years, no one else can sell so seller sells at monopoly prices
imperfect information e.g
- High risk occupation where workers do not have complete information about risks
- Hazards of using chemicals in your home without knowing dangers ad potential side effects
- Farmers are not aware of more financially and ecologically sustainable farming practices (e.g silvopastoral systems vs clearing for grazing)
silvicultural pastural systems
medium density trees on grazing land for:
- shade and shelter (better protected cattle)
- upwelling of nutrients to surface
- greater water content on surface
- when drought comes and cows die, sells trees
Draw: Inappropriate government action of logging on crown logging.
- MPC curve of logging on crown land is lower than MSC curve.
- because social cost is the maintenance of forest, bush fire suppression, construction of roads in the form of taxpayers money.
- logging companies don’t pay for ^
- Low crown stumpage prices put downward pressure on what landholders can earn form their private native forests.
- Reduces incentives to maintain tree cover
- Increases incentives to clear for grazing.
Absence of Clearly Defined and enforceable property rights e.g
- global fisheries
- if a group laboured over many conservation efforts, but it is open access, their conservation efforts are useless as there are no restriction on harvesting.
Characteristics of strong property rights
- Clearly defined in their physical extent (e.g in 3 dimension: surface, below, and above)
- Comprehensive (e.g if farmers had full rights to all resources (pasture, water, trees) then more incentive to conserve resources because they benefit from it)
- Exclusive and enforceable
- Long Duration (e.g if 20 years, no incentive to properly manage tree plantation than if it was 40 years)
- Transferable (right to be able to sell your property to someone else e.g native title rights are non transferable
- Divisible (land more valuable if divided)
- Clear and enforced responsibilities
