EC101 Chapter 5 and 6 Government

EC101 Chapter 5 and 6 Government - Government Chapters 5 &...

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Government Chapters 5 & 6 The Notion of Market Failure Considering the Political Processes Public Choice vs Private
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Marginal Cost and Marginal Benefit Quantity All quantities other than Q2 are inefficient Marginal Benefit Q1 Marginal Cost Q3 Inefficient Q2 As more resources are used to expand the level of an activity, the marginal benefits ( MB ) of the activity generally decline and marginal costs ( MC ) rise. From the viewpoint of efficiency, the activity should be expanded as long as the MB > MC . Q1 is inefficient as there are some units for which the MB exceeds the MC which are not undertaken. Q3 is inefficient as there are units produced where the MC exceeds the MB . Q2 is the economically efficient level of output. At Q2 the MB stemming from the consumption of that unit just equals the MC of producing it. Ideal Economic Efficiency
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The notion of “market failure” Failure compared to what? § Falling short of the “ideal” (even in theory) is considered “market failure” providing rationale for government intervention. § “Ideal efficiency” is often used to evaluate market outcomes. § Beware of platonic notions of the “ideal” and positing “failure” in comparison. § The next slides review problem areas for the market (two general areas):
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“Ideal” Efficiency (Pareto Optimal) § Occurs when 1. all activities generating more benefits than costs are undertaken, and 2. no activities are undertaken for which the cost exceeds the benefits. Marginal cost, marginal benefit Ideal Efficiency MB=MC Marginal cost Marginal benefit Q Q= efficient level of output; all others inefficient Market works best: 1. Under high levels of competition 2. When property rights are well defined.
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§ Lack of Competition § Externalities § Public Goods § Poor Information Four Reasons Why the Invisible Hand May Fail
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§ Sellers may gain by restricting output and raising price. § Monopoly situation § No arbitrary power to raise prices without restricting output. § Too few units will be produced. § Virtually all economists favor competition but many think that policy here is ineffective or worse—reduces competition! § (1) Lack of Competition Taking into account all potential competition, including possible substitutes, how competitive is it out there in the real world? Generally, anybody restricting output? (also see Special Topic 2 on the impact of the internet.) Internet made more competitive
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§ Externalities: Spillover effects of an activity that influence the well-being of nonconsenting third parties--market fails to register fully costs and benefits. § Third party effects: buyer, seller, externalities (i.e. when train would go by farms and sparks would set fields on fire, or pollution hurting people not invoved) § External costs (negative externalities) : § Present when the actions of an individual or group harm the property of others without their consent.
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This note was uploaded on 04/01/2012 for the course ECON 101 taught by Professor Balaban during the Fall '07 term at UNC.

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EC101 Chapter 5 and 6 Government - Government Chapters 5 &...

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