Market Failure Public Goods amp Common Property When markets fail to achieve allocative and productive efficiency Positive externalities Negative externalities Public goods ID: 760652
Download Presentation The PPT/PDF document "Dr. D. Foster - Microeconomics" is the property of its rightful owner. Permission is granted to download and print the materials on this web site for personal, non-commercial use only, and to display it on your personal computer provided you do not modify the materials and that you retain all copyright notices contained in the materials. By downloading content from our website, you accept the terms of this agreement.
Slide1
Dr. D. Foster - Microeconomics
Market Failure (?):
Public Goods & Common Property
Slide2When markets fail to achieve allocative and productive efficiency.
Positive externalities Negative externalities Public goods Common property Asymmetric information
What is
“market failure”?
When do markets fail?
Slide3Public Goods
Non-rival in consumptionOne person doesn’t use it up.
Non-excludable
Non-payers can’t be (easily) excluded.
For example: National defense Legal system Lighthouses TV and radio Roads
Slide4Not all “publicly-provided” goods meet the test of being public goods.
For example: Education Trash collection Social security National parks . . .
Roads & lighthouses ! The legal system ?!
Public Goods
Slide5Non-excludability problem leads to free riders.
How do markets deal with this problem?
“Charge” differently - TV & radio ads
Public Goods
“Tie-in
sales
- lighthouses - shopping malls - gated communities
Find way to exclude - TV & cable/satellite
Slide6Graphical Analysis
For private goods, the market demand is the horizontal summation of individual demands.Everyone pays the same price, consumes differing amounts
$10
$10
$5
$5
MC
Tom
Sally
Market
15
25
40
$2
Slide7Graphical Analysis
Everyone consumes the same amount, pays differing prices.
For
public goods, the market demand is the vertical summation of individual demands.
$10
$10
$5
$15
MC
Tom
Sally
Market
20
20
20
$8
$3
Slide8Cautions
--The free rider problem is replaced with the forced rider.--Government may be inefficient, imposing higher costs.--Without a profit motive, government may not innovate.
Government provision may not be desirable
Slide9Common Property
Weak incentive to preserve/protect.Weak incentive to maximize value.Who owns common property?Fish in the ocean
This is another free rider problem.
Slide10P
1
Q*
Q
2
D
2
Q - Fish
Price
Supply
D
1
Q
1
Q
mx
Common Property
Slide11What to do?-- Regulate use . . . - price/tax - standards - limits - prohibit-- Assign private property rights.
Common Property
Slide12Property Rights
Coase – As long as transaction costs are low.Not a market problem--Airspace.--Fish.--Endangered species.--Wild species.GroupOn and solving the free rider problem.
Slide13In 1620, the Pilgrims arrived on the Mayflower.The Pilgrims “farmed in common” for 3 years.For 3 years they suffered from malnutrition and illness.Then, it was decided to split up the land equally.A bountiful harvest followed (Thanksgiving).Thanksgiving (indirectly) celebrates private property rights!
Common Property Case Study:
The American Thanksgiving
Slide14Elephants& Property Rights
Elephants in Africa1970s - 1.2 million1980s - 600,000
2014 - 700,000 (e)
Slide15Elephants& Property Rights
Kenya – ivory burn of 10,000 elephants!
[>100 tons]
Slide16Can markets really work?
Hotelling Principle:People treat exhaustable resources like any asset and want to max. value over time.
The Simple Version - We can’t run out of . . .
D
S
P
Q
Property Rights & nonrenewable resources
S’
S”
Slide17Hotelling Principle
The more complicated story:Asset value must grow at the market rate of interest to find equilibrium extraction.If asset value grows more slowly, extraction.If asset value grows faster, extraction.
i = market returnr = asset return
r
i
%
Q
Q*
Slide18r
i
%
Q
Q*
10%
0%
4%
7%
15%
Q1
Q2
Q3
Q = amount of oil pumped out of the ground.
Slide19Asymmetric Information
-Mutually advantageous trade doesn’t take place.-Trade takes place, but isn’t mutually advantageous.
For example:
Adverse selection The market for lemons Moral hazard Principal-agent problem
Slide20Dr. D. Foster - Microeconomics
Market Failure (?):
Public Goods & Common Property