2 7 2024 MARKET FAILURES EXTERNAILITIES AND ASYMMETRIC INFORMATION Market Failures The markets fail to produce the right amount of the product Efficient outcome requires Demand curve must reflect full willingness to pay Meaning the most consumers will paid without diminishing the desire of good Supply curve must reflect all costs of productions Government Intervention is the correction of market failure Consumer surplus when you buy something way cheaper than you were willing to pay Difference between what Producer Surplus Difference between the actual price a producer receives and the minimum price they would accept Extra benefit from receiving a higher price Price discrimination Student Discounts Insurance senior citizen discount Externalitie An externality is a cost or benefit accruing to a third party external to the market transaction Positive externalties Too Little is produced Gov intervention Subsidies incentives Demand side market failure Negative externalities Too much is produced Pollution Traffic Supply sided Gov intervention Taxes and tarrifs Supply side market failure Correct Negative externalities Government Intervention Direct controls Pigovian tax purposes of pigovian tax is to redistribute the cost back to the producer or user of the negative externality Correct Positive externalities Subsidies Government provision more fundings Governemnts role in teh economy Coase Theorem Theorem states that if trade in an externality is possible and there are sufficiently low transaction costs bargaining will lead to a pareto efficient outcome regardless of the initial allocation of property Optimal reduction of an externality Officials must correctly identify the existence and cause Government failure may occure Asymmetric Information Occures when one party to a transaction possesses substantially more information than the other party which causes scarce resources to be allocated inefficiently And also typically requires government intervention to correct Inadequate buyer information about seller Gasoline Market Opec cartel price fixing Licensing of Surgeons could be new or old Used car sales you dont know the problems with the car Inadequate seller information about buyer Moral Hazard Problem Situation in which a party is more likely to take risks because the costs that could result will not be borne by the party taking the risk Ex a person with insurance against automobile theft may be less cautious about locking their car because the negative consequences of vehicle theft are now partially the responsibility of the insurance company Adverse selection problem people that are more likely to take risks buy the insurance on cars or life and the seller is in the dark Visible Pollution Hidden costs Governments want to reduce air pollution They needed to account for marginal benefits and marginal cost thus creating the cap and trade Cap and Trade Sets a cap for the total amount of emissions Assings property rights to pollute Rights can then be bought and solde 2 12 2024 Invisible hand Rational self interest that we better ourselves while simultaneously improving society Negative downside to the invisible hand allocates resources to the most wanted but not equal Efficient but not equitable Positive Negative Externalities What is market failure and when does it occur They occur when there is too much or too little produced or consumed when the cost is not fully born does not account for all of the costs by the firms or consumers Lindsey street on game day not efficient Positive externalities something you get doing nothing You make a choice when the marginal benefit is greater than the marginal cost Price above equilibrium is always a surplus Below is a shortage If
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