Transcript CHP 17. GOVERNMENT & MARKET FAILURE

MARKET GOVERNMENT GOVERNMENT
FAILURE INTERVENTION FAILURE
EXTERNALITY
-PUBLIC GOODS
MARKET
POWER
INEQUITIES
DYNAMIC
MKT. FAIL.
INDIVISIBILITY
INFORMATION
ASYMMETRY
EXTERNALITIES: impacts on third parties
besides the buyer and seller.
CONSUMPTION EXTERNALITIES: impacts
on third parties as a result of the consumption
of a good.
=>Divergence of social and private demand
PRODUCTION EXTERNALITIES: impacts
on third parties as a result of the production of
a good.
=>Divergenece of social and private supply
MARKET POWER: a downward sloping
demand curve from the point of view of the
seller; the power over the market price.
includes:
MONOPOLY, OLIGOPOLY,
MONOPOLISTIC COMPETITION,
MONOPSONY, OLIGOPSONY,
BILATERAL OLIGOPOLY, AND
BILATERAL MONOPOLY.
DYNAMIC MARKET FAILURE: the failure
through time to achieve technological change
and the failure of the market to achieve stable,
equilibrium outcomes.
examples:
- Stagnation
- Lack of technological change.
-The cobweb problem
DEAD WEIGHT WELFARE LOSS OF MONOPOLY
Price
Loss to Consumers (B)
+Loss to Producers (C)
=WELFARE LOSS
transferred to producerA
B
C
DEMAND
D
Monopoly
Case
(MC=MR)
CFCs
MARGINAL
COST
Competitive
Case
(MC=P)
(Millions of pounds per year)
MARGINAL
REVENUE
THE IMPACT OF EXTERNALITIES
Price
PRIVATE MARKET
EQUILIBRIUM PRICE
MARGINAL
COST
PRIVATE
DEMAND
SOCIALLY
OPTIMAL
PRICE
SOCIALLY
OPTIMAL
OUTPUT
CFCs
OUTPUT AT PRIVATE
MARKET
EQUILIBRIUM
(Millions of pounds per year)
SOCIAL
DEMAND
MEASUREMENT OF BENEFIT
Price of Fish
INCREMENTAL
BENEFIT OF
CURBING POLLUTION
Supply WITHOUT
CFC Regulation
Supply WITH
CFC Regulation
Demand
Fish (tons per year)
Social Costs and Benefits
Regulatory Total
Policy
Benefits
(beginning
(1)
No
Controls*
CFC
freeze
(1989)
CFC 20%
(1993)
CFC 50%
(1998)
CFC 80%
(2003)
CFC 99%
**(2005)
Social
Costs
(2)
0
Increment- Increment- Net Social
al Benefits al Costs
Benefits
(3)
(4)
(5)=(3)-(4)
0
0
-
-
3314
7
3314
7
3307
3396
12
82
5
77
3488
13
92
1
91
3553
22
65
9
56
3583
53
30
31
-1
*Base used for comparison for computring benefits and costs of phasing out CFCs
** Hypotehtica
SOCIAL COSTS AND BENEFITS
100
90
80
70
60
50
40
30
20
10
0
92
82
Incremental Social
Benefit
65
31
30
Incremental
Social Cost
7
0
9
5
20
1
50
80
99
Price
COBWEB MODEL
80
70
60
Bo
50
Ao
40
B1
A1
A3
30
A2
20
B3 Such a low price provides no incentive B2
to produce any product at all.
10
0
0
5
10
15
20
CHEMICALS (millions of pounds/year)
WHAT PREVENTS THE UNSTABLE CYCLE?
- MORE INELASTIC SUPPLY
- A LONG TIME HORIZON
- INSTANTANTANEOUS FEEDBACK
ABOUT PRICES
- IMMEDIATE ADJUSTMENT OF PRODUCTION
- COUNTERCYCLICAL INVENTORY POLICY
(requiring storable goods)
- EXTRA CAPACITY
- MARKET POWER
- COMMUNICATION, PLANNING OF MEMBERS
IN MARKET. INFORMATION ON MARKET
- MARKETS THAT ALLOW SPECULATION
AGAINST UNSTABLE BEHAVIOR
Quintiles Based on Per Capita
Income
Quintile
Cumulative %
% of
World
GNP
Cumulative
% GNP
Inequality
(2)-(4)
Average InequalInaequal- ity %
ity/%
(1)
(2)
(3)
(4)
(5)
(6)
(7)
0
0
20
20
1.80
1.80
18.2
9.1
1.82
30
50
2.58
4.38
45.62
31.91
9.57
10
60
2.53
6.91
53.09
49.36
4.94
20
80
17.22
24.13
55.87
54.48
10.90
20
100
75.87
100
0
27.94
5.59
100.00
Measure of
Total
0
Inequali 32.81
ty
WORLD INCOME DISTRIBUTION
100
90
Cumulative
% of:
Coun- GNP
tries
80
70
60
50
0
20
50
60
80
100
40
30
20
10
0
0
20
40
60
80
100
0
1.8
4.4
6.9
24.1
100
WORLD INCOME DISTRIBUTION
100
90
80
LINE OF
EQUALITY
70
60
50
USA
40
30
20
WORLD
10
0
0
20
40
60
80
100
COSTS OF DECISIONS
$ OF COST
Minimum
Cost
External
Costs of
Excluding
People
from
Decision
Total of
Internal
& External
Costs
Internal
Costs of
Gaining
Decision
Dictatorship (0%)
Majority (50%)
Unanimity (100%)
PERCENT OF PEOPLE REQUIRED FOR DECISION
GOVERNMENT STUDIES
Type of
Study
Objective of Study Definition and
Focus
Cost Benefit
Analysis
Net Social Benefit
Regulatory Impact
Analysis
Net Social Benefit
& other social
objectives
Economic Impact
Analysis
Describe all
regulatoryt impacts
Closure Analysis
Maximize
regulatory
objective
Cost Effectiveness
Analysis
Maximize pollution Avoids $ value on
abatement, etc.
benefits of
government
intervention
Up to decision
Focuses only on
makers
govt. unit
Fiscal Impact
Analysis
Implicit
Constraints
Benefits & costs
None
included to
whomever
occurring
Includes cost
Environmental &
benefit analysis and other constraints
other studies
Examines price,
output, financial, &
employment
impacts
Defines degree of
regulation that will
shut firms down
Assumes impacts
should be minimal
Implicitly, firms
are not to be shut
down
Budget or cost
constraint limits
amount of
intervention
Govt. revnue must
exceed cost
Problem
________
Comprehensive
measurement of
benefits & costs is
hard
Goes beyond costbenefit, but
becomes very
subjective
Regulation
discouraged.
Limited weighing
of costs/benefits
Overregulates
profitable,
underregulates
unprofitable
Comparisons
difficult across
different types of
intervention
Ignores costws &
benefits to society
MARKET GOVERNMENT GOVERNMENT
FAILURE INTERVENTION FAILURE
EXTERNALITY PUBLIC ENTERPRISE
-PUBLIC GOODS-NATIONALIZATION
MARKET
-PRIVATIZATION
POWER
REGULATION
INEQUITIES
- OUTPUT
DYNAMIC
- PRICE
MKT. FAIL.
- STANDARDS
INDIVISIBILITY ANTITRUST
INFORMATION
-STRUCTURE
ASYMMETRY -CONDUCT
TAXES (SUBSIDIES)
PROVISION OF
INFORMATION
RATIONING (MONEY)
ADMINISTRATIVE
COST
COMPLIANCE
COST
EFFICIENCY COST
- NEGATIVE EXTER.
-PUBLIC BADS
- MKT POWER
- INEQUITIES
- DYNAMIC
- INDIVISIBILITY
- INFORMATION