13a.+Market+Failures - Market Failures Motivation request...

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Market Failures Motivation: request from students for clarification we ended last lecture with a tension between 1) identifying & defending your personal interest; 2) sacrificing for the national interest. -How can we tell when the national interest is really at stake? -How can we tell when a policy solution helps the national interest or is actually re-distribution of wealth (or protectionism) in disguise? (e.g. tariffs, subsidies, regulation, etc.) Answer: market failures are often cited as situations in which the government has a clear role for advancing the public interest via sound policy. -Question: Why are markets good? -efficient (but what do we mean by this? less waste…supply meets demand…no surplus or shortage) -decentralized (no person or organization has power to determine supply, demand, price, distribution, production. No one has to tell ) -innovative (dynamic efficiency) What’s a market? -A market is created whenever potential sellers of a good or service are brought into contact with potential buyers, and a means of exchange is available. - In classical economics, a market is characterized by: Market informed, rational individuals involved in the free exchange of goods, services, & capital, resulting in economic efficiency Focus on individuals: rational, free, secure, informed, have property rights -(in special cases: a single prevailing price for commodities of uniform quality). Economic Efficiency The state of an economy such that no one can be made better off (without somebody else being made worse off). This requires: * productive efficiency (output is being produced at the lowest cost possible), *allocative efficiency (resources are allocated to the production of goods/services most valued by consumers) *distributional efficiency (output is distributed such that consumers do not wish to spend their incomes in any other way). Given a set of alternative allocations and a set of individuals, a movement from one allocation to another that can make at least one individual better off, without making any other individual worse off, is called a Pareto improvement or Pareto optimization. An allocation of resources is Pareto efficient or Pareto optimal when no further Pareto improvements can be made. -static (quantities of major economic factors don’t change; no shocks or disturbances) -dynamic (things change over time; technology, population, forms of organization) For example: Dynamic gains from trade: - 1 -
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The dynamic gains from trade are the economic growth and development stimulated by international trade, and include a: (a) technology transfers; (b) capital accumulation fostered because trade increases
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This note was uploaded on 01/16/2012 for the course INTA 1200 taught by Professor Birchfield during the Spring '08 term at Georgia Tech.

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13a.+Market+Failures - Market Failures Motivation request...

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