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Chapter 2A, Market failure, Chapter 2B, Chapter 2C, Chapter 3B - Coggle…
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Market failure
externalities
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MPC/MPB, not aware of the MSB/MSC
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imperfect information on costs/benefits. (the consumers have no idea or are ignorance of thier hidden costs, thuss contradicting the rational behavior)
How does the consumer suffer from imperfect infromation. The consumer underestimates the cost behind doing the negative action. The social optimal level quantity is lower and the MPC is much higher. This creates a deadwight loss due to the difference in MPB and dnew MPC.
There should be negative externalities as well, its not fully ignored
How does the consumer suffer from imperfect information on benefits. People fail to realize the full benefits of attending skills future training and miss out on the potential benefits it brings, higher salary and etc. The social optimal level is higher and the MPB should be higher and the consumer need to increase their consumption.
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Causes of market failure: Consumers maximising self interest, market failure and not able to be efficient and have equaity
Public good: is a good that has non rivalry and non excludability. The government will provide base on the benefits and cost analysis. Costs: monetary cost, unintended consequences etf. Benefits Present and future. Government will undergo the project if mpb > mpc
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non excludability: No one gets left out on the benefits that can be enjoyed by another person, etc street light
service providers cannot possibly ask consumers to pay, free rider problem, no one would pay for it
However, without price mechanism, the government may not know the cost and benefits, ending up providing more than it should due to missing price mechanism.
Non rejectablility: Able to reject the benefits of consuming the good, no choice to choose
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Asymmetric information: The information known to one party is more than the other. This may lead to incorrect option chosen and choice made, leading to market failure
Averse selection: Before transactions, One party does not have sufficient information and make a choice which would lead to lower social welfare, distortion of incentives and inefficient market outcomes
Market fails: 1. Party A has information than Party B before transaction. 2. A does not know if the product is good. 3.Doesn’t have enough informati9 thus only willing to pay a lower price.4. With a lower price, B has a good quality product, B will not be willing to offer it to sell. If B has good quality then he will gladly sell. 5. Market may fail entirely if party a decides to leave the market.
Market fails for producers: insurers wants to sell insurerance however he does not know who is the healthy and unhealthy people. Make a price for 76. For all people however the unhealthy people see it as worthwhile sine they thought the price s 100. The producer will make a loss thus leave the market.
Solution: 1 . Warranty is provided to do signalling to the consumers that your product is of good quality. 2. Screening from uniformed party to reveal information on the products. 3. Invetstijg in information. 4. Law(gov): consumer protection fair trading act CPFTA. Replacement and repayment of purchased product within 6months. Having industry standards and health products bill (to investigate if the product has side effects)
Moral Hazard:After transactions ,
A has more information than after B in the trade. B does not have full information on how A will benefit from consuming the product, A might exploit on the product he buy. B leaves the martket and market fails
A few shop owners buy fire insurance and feel that there’s a n incentive to use the insurance . This result in higher cost to the seller and the price of insurance increase over time . Other sellers not being able to afford the product thus not sales and the seller leave the market.
Solution: 1. Incentives , lower premiums to some who can show that they can take proper precautions against risks. 2. Deductibles and co - payment. Deductibles, initial sum of money that the insurer has to pay before the insurer can pay for him. Co payment, only part of the cost is paid by the insurers, cost is still incurred
meaning of market failure: The free market fails to allocate resources efficiently, allocative efficinecy is not present
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Chapter 2B
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XED (degree of responsiveness of change in the demand of product a , to a change in the price of product b )
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Chapter 3B
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Government intervation
Taxes: Imposing a fixed tax on the firm, the firm has an increase in average cost, the , AC shifts down and the area representing profits, bound under the MC=MR, will decrease.
No change in pruice and quantity, since only ac shift and the consumer do not bare the burden of tax. Trasnfers economic profit of monopolist to consumers
Less incentive to innovate, reduce the R and D and variety, etc is lost
Anti trust legislation (used to fine monopoly who are using their power to influence the markets) : Google charged by EU to download thier software in the handphones made from factories. This restricts the manufactures and make it hard for their competitors to enter the market. This attracts more firms wanting to advertise to use google advetising instead.
Priofit tax, only when the producer earns, tax is imposed.
Price regulations: Natural Monopoly, The Equilibrium price is lower and output is higher.MC pricing: Allocative efficiency is achieced becasue P=MC, and the government need to subsidise the subnormal profit of the firm. AC pricing, the P<MC, the normal porift is made but the societal welfare deadweight loss
Liberalisation/Deregulation in Singapore: Allowing more firms to enter and more competition in the market
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