Market Failure, Regulation & Competition

Transcription

1 Types Mrket of Filures Mrket Topic 8: Mrket Filure, Regultion & Competition Perfectly Competitive Mrket Goods/services offered re ll sme Numerous buyers nd sellers nd no single buyer or seller cn influence the mrket price - price tkers Oligopoly Few sellers Ech prticipnt is wre of the ctions of the others Monopolistic Goods/services re slightly differentited Numerous sellers ech seller hs some bility to influence the price Monopoly No substitute vilble for the goods/services offered Only one seller nd this seller sets the price price mker Wht is Mrket Filure Mrket filure occurs when freely functioning mrkets, operting without government intervention, fil to deliver n efficient or optiml lloction of resources Therefore economic nd socil welfre my not be mximized This leds to loss of economic efficiency Mrket fils to produce the right mount of the product Resources my be Over-llocted Under-llocted Types of Mrket Filures emnd-ide Filures upply-ide Filures 1

2 emnd-ide Filures Impossible to chrge consumers wht they re willing to py for the product ome cn enjoy benefits without pying upply-ide Filures Occurs when firm does not py the full cost of producing its output Externl costs of producing the good re not reflected in the supply Efficiently Functioning Mrkets emnd curve must reflect the consumers full willingness to py upply curve must reflect ll the costs of production Consumer urplus ifference between wht consumer is willing to py for good nd wht the consumer ctully pys Extr benefit from pying less thn the mximum price 2

3 Consumer urplus Producer urplus P 1 Consumer urplus Equilibrium Price ifference between the ctul price producer receives nd the minimum price they would ccept Extr benefit from receiving higher price LO2 Producer urplus Efficiency Revisited Producer surplus Consumer surplus P 1 Equilibrium price P 1 Producer surplus LO2 3

4 Efficiency Losses Efficiency Losses Efficiency loss from underproduction Efficiency loss from overproduction d b b f e g c c Q 2 Q 3 Privte Goods Produced in the mrket by firms Offered for sle Chrcteristics Rivlry Excludbility Public Goods Provided by government Offered for free Chrcteristics Nonrivlry Nonexcludbility Free-rider problem 4

5 Cost-Benefit Anlysis Cost Resources diverted from privte good production Privte goods tht will not be produced Benefit The extr stisfction from the output of more public goods Externlities A cost or benefit ccruing to third prty externl to the trnsction Positive externlities Too little is produced emnd-side mrket filures Negtive externlities Too much is produced upply side mrket filures Government Intervention Correct negtive externlities irect controls pecific txes Correct positive externlities ubsidies Government provision P 0 Government Intervention Negtive externlities b Q o c t () Negtive externlities Overlloction Q e Q P 0 T Q o Q e t Q (b) Correct externlity with tx 5

6 Government Intervention Government s Role in the Economy Methods for eling with Externlities Problem Negtive externlities (spillover costs) Positive externlities (spillover benefits) Resource Alloction Outcome Overproduction of output nd therefore overlloction of resources Underproduction of output nd therefore underlloction of resources Wys to Correct 1. Privte brgining 2. Libility rules nd lwsuits 3. Tx on producers 4. irect controls 5. Mrket for externlity rights 1. Privte brgining 2. ubsidy to consumers 3. ubsidy to producers 4. Government provision Government cn hve role in correcting externlities Officils must correctly identify the existence nd cuse Hs to be done in the context of politics Mlysin Competition Policy 6