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Inefficiency of competition - Coggle Diagram
Inefficiency of competition
welfare theorem
1st welfare theorem
a competitive market is efficient when there are no externalities present and there is perfect information
2nd welfare theorem
inefficiency from externalities can be addressed by assigning property rights
coarse theorem
assumptions
costless bargaining
regardless of how property rights are assigned, with an externality, the allocation of resources will be efficient when the parties can costlessly bargain with each other.
Limitations
transaction costs
many parties can cause externalities and are negatively affected
incomplete information
parties do not know the costs and benefits of externality and bargaining may not be efficient
holdout problem
property rights give each party power (equal) --> this causes a negotiation breakdown
Externalities
4 cases
production
positive
negative
consumption
negative
positive
Public goods
characteristics
non rivalry
non excludability