{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

EC101 Chapter 5 and 6 Government

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

Info icon This preview shows pages 1–8. Sign up to view the full content.

View Full Document Right Arrow Icon
Government Chapters 5 & 6 The Notion of Market Failure Considering the Political Processes Public Choice vs Private Choice
Image of page 1

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
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
Image of page 2
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): lack of competition
Image of page 3

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
“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.
Image of page 4
§ Lack of Competition § Externalities § Public Goods § Poor Information Four Reasons Why the Invisible Hand May Fail
Image of page 5

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
§ 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! § Expansion encourages compitition (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
Image of page 6
§ 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.
Image of page 7

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Image of page 8
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern