MARKET GOVERNMENT GOVERNMENT FAILURE INTERVENTION FAILURE EXTERNALITY -PUBLIC GOODS MARKET POWER...
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KET GOVERNMENT GOVERNMENT LURE INTERVENTION FAILURE XTERNALITY PUBLIC GOODS ARKET POWER NEQUITIES YNAMIC MKT. FAIL. NDIVISIBILITY NFORMATION ASYMMETRY AILURE TO RATION
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Transcript of MARKET GOVERNMENT GOVERNMENT FAILURE INTERVENTION FAILURE EXTERNALITY -PUBLIC GOODS MARKET POWER...
MARKET GOVERNMENT GOVERNMENTFAILURE INTERVENTION FAILURE EXTERNALITY -PUBLIC GOODSMARKET POWER INEQUITIES DYNAMIC MKT. FAIL. INDIVISIBILITYINFORMATION ASYMMETRYFAILURE TO RATION
EXTERNALITIES: impacts on third parties besides the buyer and seller.
CONSUMPTION EXTERNALITIES: impactson third parties as a result of the consumptionof a good.=>Divergence of social and private demand
PRODUCTION EXTERNALITIES: impactson third parties as a result of the production ofa good.=>Divergenece of social and private supply
SmokingPrivate Demand Private Supply
# of packs
$10/Pack
Price
Market equilibriumPrice
The Consumption Externality of Smoking:Suppose everyone who smokes a pack costs $5 in costs on everyone else who breathes the fumes. Private demand (the hooked) is in black. Social demand is in RED (deduct health cost). Private Demand Private Supply
$5 perpack
# of packs
$10/Pack
Price
The Consumption Externality of Smoking:Suppose everyone who smokes a pack costs $5 in costs on everyone else who breathes the fumes. Private demand (the hooked) is in black. Social demand is in RED (deduct health cost). Private Demand Private Supply
$5 perpack
# of packs
The Consumption Externality of Smoking:Suppose everyone who smokes a pack costs $5 in costs on everyone else who breathes the fumes. Private demand (the hooked) is in black. Social demand is in RED (deduct health cost). Private Demand Private Supply
$5 perpack
# of packs
Socially Desirable Price=$8.46 per pack
Tobacco Production:
Production Externality Private Demand Private Supply
Pounds of tobacco
$2 perpound
Price
Market equilibriumPrice
Tobacco Production: Every pound sold builds sound community of the U.S.A.: value of moral fiber= $1 per $2 sold (50% ad valorem)
Private Demand Private Supply
Pounds of tobacco
$3 perpound
Price
50% above private market price:Ad valorem sales subsidy
Contradictory policy on production and consumption: other examples:
-Car production ($50 billion for GM, emission controls and clunker taxes)-Electric Power (subsidize production, tax consumption (carbon tax))-Oil (subsidize production (depletion allowance, foreign tax exemption), tax consumption at pump)-Steel (tax pollution, subsidize production (tariff))-Medical education (subsidize doctor education, tax physician incomes & malpractice insurance requirement)
MARKET POWER: a downward sloping demand curve from the point of view of theseller; the power over the market price.
includes: MONOPOLY, OLIGOPOLY,MONOPOLISTIC COMPETITION,MONOPSONY, OLIGOPSONY,BILATERAL OLIGOPOLY, ANDBILATERAL MONOPOLY.
DEAD WEIGHT WELFARE LOSS OF MONOPOLY
DEMAND
MARGINAL COST
MonopolyCase
CompetitiveCase
transferred to producerA
Loss to Consumers+Gain to Producers=Increased profit to producers
Railroad Rates ($/ton mile)
Price Due to higher prices
Due to lower costs
Deadweight loss: due to lower output neither gains
DYNAMIC MARKET FAILURE: the failurethrough time to achieve technological changeand the failure of the market to achieve stable,equilibrium outcomes.
examples:- Stagnation
- Lack of technological change. -The cobweb problem - Instability
0
1 0
2 0
3 0
4 0
5 0
6 0
7 0
8 0
0 5 1 0 1 5 2 0
COBWEB MODEL
Ao
B3
CHEMICALS (millions of pounds/year)
Price
Suppose a shock knocks the price on theMarket higher to Ao.
0
1 0
2 0
3 0
4 0
5 0
6 0
7 0
8 0
0 5 1 0 1 5 2 0
COBWEB MODEL
AoA1
B3
CHEMICALS (millions of pounds/year)
Price
Because of higher prices, more firms enterThe market to produce more quanity supplied
0
1 0
2 0
3 0
4 0
5 0
6 0
7 0
8 0
0 5 1 0 1 5 2 0
COBWEB MODEL
AoA1
A2
B3
CHEMICALS (millions of pounds/year)
Price
With so much production, there is a surplusOn the market and prices fall.
0
1 0
2 0
3 0
4 0
5 0
6 0
7 0
8 0
0 5 1 0 1 5 2 0
COBWEB MODEL
AoA1
A2
A3
B3
CHEMICALS (millions of pounds/year)
Price
With such low prices firms get out of theMarket and there is very little supplied.
0
1 0
2 0
3 0
4 0
5 0
6 0
7 0
8 0
0 5 1 0 1 5 2 0
COBWEB MODEL
AoA1
A2
A3
Bo
B3
CHEMICALS (millions of pounds/year)
Price
With so little production, people pay a lotFor what is available
0
1 0
2 0
3 0
4 0
5 0
6 0
7 0
8 0
0 5 1 0 1 5 2 0
COBWEB MODEL
AoA1
A2
A3
Bo
B1
B3
CHEMICALS (millions of pounds/year)
Price
High prices induce firms to enter… withA lag
0
1 0
2 0
3 0
4 0
5 0
6 0
7 0
8 0
0 5 1 0 1 5 2 0
COBWEB MODEL
AoA1
A2
A3
Bo
B1
B2B3
CHEMICALS (millions of pounds/year)
Price
Overexpansion causes the price to drop
0
1 0
2 0
3 0
4 0
5 0
6 0
7 0
8 0
0 5 1 0 1 5 2 0
COBWEB MODEL
AoA1
A2
A3
Bo
B1
B2B3
CHEMICALS (millions of pounds/year)
Price
Such a low price provides no incentiveto produce any product at all.
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 BEHAVIORGovernment intervention: BUFFER STOCKS
Quintiles Based on Per Capita Income
Quin- tile
Cumu- lative %
% of World GNP
Cumu- lative % GNP
Inequal- ity (2)-(4)
Average Inaequal- ity/%
Inequal- ity %
(1) (2) (3) (4) (5) (6) (7)
0 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
Total 100.00 Measure of Inequality
32.81
0
1 0
2 0
3 0
4 0
5 0
6 0
7 0
8 0
9 0
1 0 0
0 2 0 4 0 6 0 8 0 1 0 0
Cumulative % of:Coun- GNPtries
0 0 20 1.8 50 4.4 60 6.9 80 24.1100 100
WORLD INCOME DISTRIBUTION
0
10
20
30
40
50
60
70
80
90
100
0 20 40 60 80 100
WORLD INCOME DISTRIBUTION
LINE OFEQUALITY
USA
WORLD
FOUR FAILURES TO RATION
QUANTITY
P
R
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C
E
QUANTITY
P
R
I
C
E
QUANTITY
P
R
I
C
E
QUANTITY
P
R
I
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E
Demand Supply
Glut
Se-vere
Shor-tage
Not a Problem Infeasibility
GOVERNMENT STUDIESType ofStudy
Objective of Study Definition andFocus
ImplicitConstraints
Problem________
Cost BenefitAnalysis
Net Social Benefit Benefits & costsincluded towhomeveroccurring
None Comprehensivemeasurement ofbenefits & costs ishard
Regulatory ImpactAnalysis
Net Social Benefit& other socialobjectives
Includes costbenefit analysis andother studies
Environmental &other constraints
Goes beyond cost-benefit, butbecomes verysubjective
Economic ImpactAnalysis
Describe allregulatoryt impacts
Examines price,output, financial, &employmentimpacts
Assumes impactsshould be minimal
Regulationdiscouraged.Limited weighingof costs/benefits
Closure Analysis Maximizeregulatoryobjective
Defines degree ofregulation that willshut firms down
Implicitly, firmsare not to be shutdown
Overregulatesprofitable,underregulatesunprofitable
Cost EffectivenessAnalysis
Maximize pollutionabatement, etc.
Avoids $ value onbenefits ofgovernmentintervention
Budget or costconstraint limitsamount ofintervention
Comparisonsdifficult acrossdifferent types ofintervention
Fiscal ImpactAnalysis
Up to decisionmakers
Focuses only ongovt. unit
Govt. revnue mustexceed cost
Ignores costws &benefits to society
PRIVATE (for profit) STUDIESType of Study
Objective of Study
Definition and Focus Implicit Constraints
Problem ________
Private Cost Benefit Analysis***
Net Social Benefit must be positive
Private benefits & costs ONLY
None Requires measurement of all benefits & costs. Ignores unmeasurable ones
Regulatory Impact Analysis
Multiple social objectives
Includes cost benefit analysis and other studies
Environmental & other constraints
Goes beyond cost-benefit, but becomes very subjective
Economic Impact Analysis***
Maximizes costs on the regulated
Examines price, output, financial, & employment impacts
arbitrary limits on acceptable costs of compliance
Regulation discouraged. Ignores most social benefits and costs
Closure Analysis***
Minimizes regulatory objective
Defines degree of regulation that will shut firms down
Implicitly, firms are not to be shut down
Over regulates profitable, under regulates unprofitable
Cost Effectiveness Analysis
Minimizes ratio of net cost to net effectiveness
Maximizes efficiency in achieving objective
Budget or cost constraint of organization
Comparisons difficult when objectives (“effectiveness”) differ across programs
Fiscal Impact Analysis
Maximize net govt. surplus
Focuses only on government finances
Govt. revenue must exceed cost
Ignores full costs & benefits to society
*** Focuses only on private costs and benefits, not public costs and benefits
PRIVATE (for profit) STUDIESType of Study
Objective of Study
Definition and Focus Implicit Constraints
Problem ________
Private Cost Benefit Analysis***
Net Social Benefit must be positive
Private benefits & costs ONLY
None Requires measurement of all benefits & costs. Ignores unmeasurable ones
Regulatory Impact Analysis
Multiple social objectives
Includes cost benefit analysis and other studies
Environmental & other constraints
Goes beyond cost-benefit, but becomes very subjective
Economic Impact Analysis***
Maximizes costs on the regulated
Examines price, output, financial, & employment impacts
arbitrary limits on acceptable costs of compliance
Regulation discouraged. Ignores most social benefits and costs
Closure Analysis***
Minimizes regulatory objective
Defines degree of regulation that will shut firms down
Implicitly, firms are not to be shut down
Over regulates profitable, under regulates unprofitable
Cost Effectiveness Analysis
Minimizes ratio of net cost to net effectiveness
Maximizes efficiency in achieving objective
Budget or cost constraint of organization
Comparisons difficult when objectives (“effectiveness”) differ across programs
Fiscal Impact Analysis
Maximize net govt. surplus
Focuses only on government finances
Govt. revenue must exceed cost
Ignores full costs & benefits to society
*** Focuses only on private costs and benefits, not public costs and benefits
MARKET GOVERNMENT GOVERNMENTFAILURE INTERVENTION FAILURE EXTERNALITY PUBLIC ENTERPRISE ADMINISTRATIVE-PUBLIC GOODS-NATIONALIZATION COSTMARKET -PRIVATIZATION COMPLIANCE POWER REGULATION COSTINEQUITIES - OUTPUT EFFICIENCY COSTDYNAMIC - PRICE - NEGATIVE EXTER. MKT. FAIL. - STANDARDS -PUBLIC BADSINDIVISIBILITY ANTITRUST - MKT POWERINFORMATION -STRUCTURE - INEQUITIES ASYMMETRY -CONDUCT - DYNAMICFAILURE TO TAXES (SUBSIDIES) - INDIVISIBILITY RATION PROVISION OF - INFORMATION INFORMATION RATIONING (MONEY)
