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CHAPTER 6 Market failure and socially undesirable outcomes ii - Coggle…
CHAPTER 6
Market failure and socially undesirable outcomes ii
positive production externalities
MPC ≠ MSC
MSB = MPB
Qm < Qopt
external benefit created by producers
correcting positive production externalities
direct government provision
disadvantages
Can be costly for the government, requiring funding through taxation.
Risk of inefficiencies, as government programs may lack the profit motive that drives efficiency in the private sector
advantages
Ensures that the good or service is provided, especially if private provision is insufficient.
Guarantees equal access, particularly in cases where access is critical for public welfare.
Subsidies
advantages
Encourages private firms to produce more, leveraging the efficiency and innovation of the private sector.
Lower financial burden on the government compared to direct provision, as it only covers a portion of the costs
disadvantages
Potential for dependency, where firms rely on subsidies rather than becoming self-sustaining.
Can lead to government budget strain if subsidies are too extensive or prolonged
positive consumption externalities
external benefit created by the consumers
MSB ≠ MPB
MPC = MSC
Qm < Qopt
correcting positive production externalities
government legislation & regulation
education and awareness
nudge theory
direct government provision
subsidies
public goods
goods that are beneficial to society but which will not be provided by private firms due to the principles of non-excludability and non-rivalry; provided by the governments
non-excludability - inability of private firms to exclude certain customers from using their product
non-rivalry - inability of the product to beused up
under-provision of public goods
private firms unwilling to invest: cannot capture the full value of their investment
some consumers may be unwilling to pay full: free-ride on others consumption
result in suboptimal alocation of resources
government intervention
do nothing
direct government provision
opportunity cost - requires provision paid by government
contract out
opportunity cost - requires provision paid by government
quasi-public goods
non-rivalrous and excludable
museums, toll roads
asymmetric information
Adverse Selection
the party with more information has an advantage in knowing their own risk profile as compare to the party offering the service or product
information is available to buyers but not to sellers
information available to sellers but not to buyers
Moral Hazard
one party takes risks but does not face the full cost of these risks because the full costs of risks are bone by the other party
example : insurance
response to asymetric information
government
licensure
advantages
Ensures a minimum standard of quality and competence, especially in critical fields like healthcare and legal services.
Protects consumers from low-quality or dangerous goods and services.
disadvantages
can create barriers to entry, reducing competition and potentially increasing prices
risk inefficiency or corruption in the licensure process
regulation
advantages
ensure quality standards and safety features that must be maintained by producers and sellers of goods and services
disadvantages
time consuming, bureaucratic procedures, work to slow down economic activities
provision of information
advantages
Helps consumers and producers make informed decisions, reducing the information gap.
Can prevent exploitation and promote fairer market practices.
disadvantages
Costly for the government to gather and disseminate information
Not always effective if consumers or producers disregard the information provided
private
screening (party with less information)
Advantages
easier - consumer can find information provided on the internet or informally ask friends for information
Disadvantages
cannot provide systematic and complete information to match the information available on seller's side
signalling (party with more information)
Advantages
convince buyers that the product being sold is of good quality
Disadvantages
unlikely to provide full information to buyers and may provide inaccurate or misleading information
equity of distribution of income and wealth
Households earn income by selling their labor to firms, which is then used to buy goods and services, creating a continuous flow of money in the economy.
income disparities can emerge, as not all labor or resources are rewarded equally in the market.
free market cause income inequality
In a free market, resources are allocated based on efficiency, not fairness.
those with scarce, specialized, or high-demand skills earn more, while others may struggle with lower wages.
inequalities in wealth
individuals in high-income jobs can save and invest, increasing their wealth over time. Lower-income earners, however, have limited savings and fewer investment opportunities.
widening wealth gap, with wealth concentrated among a small portion of the population
market failure
resources are not allocated in the most socially beneficial way (allocative inefficiency).
not necessarily relate to whether everyone in society can meet their basic needs or whether there is income and wealth equality.
market could theoretically achieve allocative efficiency even with significant inequality or situations where some people are unable to meet their needs
