LectNotes-3-Thinking-MarkFailure-Sept27-2330

LectNotes-3-Thinking-MarkFailure-Sept27-2330 - THINKING...

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THINKING ABOUT THE MARKET September 27, 2010 Lecture/Week 3 Prof. Salazar Sosc 2330 – Econ of Law
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2 OBJECTIVES 1. Market Failure Concept Example: New York 1929, Cell Phone class lawsuit in Canada 2. Market failures provide a rationale for legal intervention: law may mitigate market failures 3. Conclusion: Complexities of Market Failures: unemployment as market failure?
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3 MARKET FAILURES LAW ECON IDEA OF ‘MARKET FAILURE’ OFFERS AN IMPORTANT RATIONALE FOR LAW’S ROLE
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4 INTRODUCTION Two mechanisms to provide goods and services and enhance society’s welfare: Government Private Markets: supply and demand driven by prices (reflect unobservable preferences) and free competition result in efficient outcomes Market may however fail to provide efficiently or fairly Social consequences of market failures may be significant: e.g. the 1929 Great Depression Important understand when markets fail and the role of law in correcting market failures
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5 IDEAL MARKETS & EFFICIENT OUTCOMES Large numbers of competing buyers and sellers. Each firm is a price taker Existence of perfect substitutes Perfect information Equal access to technology No barriers to entry and exit. No externalities. All costs and benefits priced. Accurate expression of individuals preferences. Low transaction costs (e.g. enforcing contracts)
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6 Consumer debt, slow U.S. growth worry Carney (Financial Post, Fri, Sept 24, 2010) “Another factor worrying the central bank is the record- high level of household debt. (On a debt-to-disposable income ratio, household indebtedness stands at over 140%.)”
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Ideal Markets do not exist in the real economy There are often Market Failures
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MARKET FAILURES ACCORDING TO ECONOMICS
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9 IMPERFECT INFORMATION MARKET POWER EXTERNALITIES MARKET FAILS SOCIETY’S WELFARE DECREASES CONSUMERS High price, Poor quality No provision COMPANIES Loss, lay-off bankruptcy SOCIAL SYSTEM Political instability poverty OTHER FAILURES ‘IRRATIONAL BEHAVIOUR’ Public goods, unemployment
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SOCIAL COST OF MARKET FAILURES CAN BE DEVASTATING 1930 Great Depression in US 2008-2009: millions of Americans are losing their houses
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CAN THE LAW HELP MITIGATE MARKET FAILURES? HOW? WHILE RESPONDING TO MARKET FAILURES, THE LAW MAY ALSO SEEK TO RESOLVE OTHER ‘NON-ECONOMIC’ PROBLEMS (e.g. protect vulnerable consumers) AND PURSUE ‘NON-MARKET’ VALUES (e.g. fairness, equality)
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12 LAW MARKET FAILURES Examples COMPETITION LAW MARKET POWER Remove barriers to free competition, Prevent abuse of market power CONSUMER LAW INFORMATION ASYMMETRY Impose duty to disclose information ENVIRONMENTAL LAW EXTERNALITIES Pollution caps, taxing polluters
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LectNotes-3-Thinking-MarkFailure-Sept27-2330 - THINKING...

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