16-Externalities and Public Goods

16-Externalities and Public Goods - Agenda Course Overview...

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1 Agenda • Course Overview • Market Failure • Externalities • Examples • Public Remedies • Private Remedies • Tragedy of the Commons • Public Goods • What To Take Away Microeconomics The Structure of the Course Consumers and Producers Market Interaction Today’s lecture Uncertainty Perfect competition Monopoly and Pricing strategies Competitive Strategy Auctions Information in Markets and Agency Game Theory Introduction to Markets Consumer Theory and Demand Technology and Production
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2 Agenda • Course Overview • Market Failure • Externalities • Examples • Public Remedies • Private Remedies • Tragedy of the Commons • Public Goods • What To Take Away Efficiency of Competitive Markets Competitive markets are economically efficient : total consumer and producer surplus is maximum (maximizes “gains from trade”).: Every producer that is not selling faces a marginal cost for an extra unit that is higher than the valuation for that unit of the marginal consumer. Every consumer that is not buying one extra unit has a valuation for this unit that is lower than the marginal cost of producing this unit. A producer with a marginal cost of 7 would serve a consumer with a marginal valuation lower than 5. Consumer Surplus Quantity Price S D Q 0 5 9 A consumer with a marginal valuation of 3 would need to be served by a producer with a marginal cost larger than 5. Producer Surplus 3 Q D Q S 7
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3 The efficiency of a Competitive Market In the evaluation of markets, we often talk about whether it reaches economic efficiency, i.e. the maximization of aggregate consumer and producer surplus. A competitive market outcome generates a number of transactions between consumers and producers. We could ask ourselves if we can improve the total benefits created (“gains from trade”) by changing the parties and amount of these transactions: Every producer that is not selling faces a marginal cost for an extra unit that is higher than the valuation for that unit of the marginal consumer. Every consumer that is not buying one extra unit has a valuation for this unit that is lower than the marginal cost of producing this unit. Competitive market outcomes are efficient: all gains from trade are exhausted. Market Intervention Perfectly competitive markets are economically efficient. However, there are many reasons that may prevent actual markets from achieving economic efficiency. In particular, frictions in markets may prevent all possible gains from trade to materialize. In this case we speak of “ market failure ” (failure in the sense that economic efficiency is not achieved ). Note that a market failure may constitute grounds for the government to intervene in the market to reduce the friction and increase the performance of markets. As we will see, however, private parties can also device arrangements aimed at overcoming frictions (that is there may be also private remedies to improve market performance, not only public remedies).
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This note was uploaded on 11/30/2010 for the course ECON 251 taught by Professor Tontz during the Fall '10 term at USC.

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16-Externalities and Public Goods - Agenda Course Overview...

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