week2 - III MARKET FAILURES Can government intervention...

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1 III. MARKET FAILURES Can government intervention improve economic efficiency? A. Types of market failures 1. Monopolies – producer can affect price and raise it above marginal cost. Violates MC X / MC Y = P X / P Y Examples: public utilities, like water, power. 2. Public goods – not rival in consumption. Consumers have incentive to hide preferences and free ride. Examples: light house, street lights, national defense, education 3. Externalities – actors affect each other outside of market. Deviation between social and private costs and benefits Example: pollution. 4. Imperfect or costly information – takes time and effort to find lowest price alternative. Example: health status in market for health insurance. 5. Nonexistence of market – no private market for some goods. Examples: poverty insurance, R & D for some goods. B. Public goods. 1. Nature of public goods. a. Non-rival in consumption: my consumption of good does not affect your consumption. b. Consumption is same for all, but each consumer does not need to value it the same.
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2 c. Classification is not absolute – public nature of a good depends on conditions and technology; e.g. lecture in hall, versus on-line. d. Excludability is related, but distinct, topic. 1. Excludable goods: you can prevent individual from consuming good. 2. Some non-rival goods are not excludable – light house, defense. 3. Some non-rival goods are excludable – beach or park. 4. Rival goods may be non-excludable – freeway . 5. Pure public good is both non-rival and non-excludable. 2. Market for public goods: horizontal versus vertical summation. a. Market demand for private goods derived by horizontal summation of individual consumers’ demand. Consumer A 0 50 100 150 200 250 300 350 400 0 50 100 150 200 Q P Q A P Consumer B 0 50 100 150 200 250 300 350 400 0 50 100 150 200 Q P Q B P Total, Consumers A+B 0 50 100 150 200 250 300 350 400 0 50 100 150 200 Q P Q A+B P Figure 1 1) Price faced by consumers A & B is the same, but the quantities consumed can be different. 2) E.g., consumer A demand 4 at price of 10, and consumer B demand 3; total demand (of two-consumer market) is 7.
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This note was uploaded on 06/30/2009 for the course ECON 103 taught by Professor Sandrablack during the Fall '07 term at UCLA.

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week2 - III MARKET FAILURES Can government intervention...

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