market failure

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intro to market failure

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Presentation Transcript

Slide 1: 

Market Failures and Government Policy

Market Failures: Externalities and Public Goods : 

Market Failures: Externalities and Public Goods Society's microeconomic objectives equity social efficiency marginal social benefits and costs production where MSB = MSC

Market Failures: Externalities and Public Goods : 

Market Failures: Externalities and Public Goods Externalities External costs of production MSC > MC

External costs in production : 

External costs in production O Costs and benefits Quantity

External costs in production : 

O MC = S D P MSC Costs and benefits Quantity Q1 External costs in production

Market Failures: Externalities and Public Goods : 

Externalities External costs of production MSC > MC External benefits of production MSC < MC Market Failures: Externalities and Public Goods

External benefits in production : 

External benefits in production O D P MC = S Q1 Costs and benefits Quantity

External benefits in production : 

O MSC D P Costs and benefits Quantity MC = S External benefits in production

Slide 9: 

O MC = S D P Q 1 Q 2 Costs and benefits (£) Quantity MSC (a ) External costs O D P Q 2 Q 1 Costs and benefits (£) Quantity MSC MC = S (b) External benefits External costs and benefits in production

Market Failures: Externalities and Public Goods : 

Externalities External costs of production MSC > MC External benefits of production MSC < MC External costs of consumption Market Failures: Externalities and Public Goods

Market Failures: Externalities and Public Goods : 

Externalities External costs of production MSC > MC External benefits of production MSC < MC External costs of consumption MSB < MB Market Failures: Externalities and Public Goods

External costs in consumption : 

External costs in consumption O D P Costs and benefits Quantity

External costs in consumption : 

O D P Costs and benefits Quantity MSB Q1 External costs in consumption

Market Failures: Externalities and Public Goods : 

Externalities External costs of production MSC > MC External benefits of production MSC < MC External costs of consumption MSB < MB External benefits of consumption Market Failures: Externalities and Public Goods

Market Failures: Externalities and Public Goods : 

Externalities External costs of production MSC > MC External benefits of production MSC < MC External costs of consumption MSB < MB External benefits of consumption MSB > MB Market Failures: Externalities and Public Goods

External benefits in consumption : 

O D P Q1 Costs and benefits Quantity External benefits in consumption

External benefits in consumption : 

O D P Q1 Costs and benefits Quantity MSB External benefits in consumption

Slide 18: 

O MB P P Costs and benefits (£) Car miles MSB O MB P P Costs and benefits (£) Rail miles MSB (a ) External costs (b) External benefits External costs and benefits in consumption

Market Failures: Externalities and Public Goods : 

Externalities External costs of production MSC > MC External benefits of production MSC < MC External costs of consumption MSB < MB External benefits of consumption MSB > MB Public goods Market Failures: Externalities and Public Goods

Market Failures: Externalities and Public Goods : 

Externalities External costs of production MSC > MC External benefits of production MSC < MC External costs of consumption MSB < MB External benefits of consumption MSB > MB Public goods non rivalry Market Failures: Externalities and Public Goods

Market Failures: Externalities and Public Goods : 

Externalities External costs of production MSC > MC External benefits of production MSC < MC External costs of consumption MSB < MB External benefits of consumption MSB > MB Public goods non rivalry non-excludability Market Failures: Externalities and Public Goods

Market Failures: Monopoly Power : 

Market Failures: Monopoly Power The demand curve under monopoly production at less than the social optimum

A monopolist producing less than the social optimum : 

A monopolist producing less than the social optimum O £ Q

A monopolist producing less than the social optimum : 

O P1 MC1 MC = MSC Q1 MR AR = MSB Q2 P2 = MSB = MSC £ Q A monopolist producing less than the social optimum

Market Failures: Monopoly Power : 

Market Failures: Monopoly Power The demand curve under monopoly production at less than the social optimum Deadweight loss under monopoly consumer and producer surplus consumer surplus

Market Failures: Monopoly Power : 

The demand curve under monopoly production at less than the social optimum Deadweight loss under monopoly consumer and producer surplus consumer surplus producer surplus Market Failures: Monopoly Power

Market Failures: Monopoly Power : 

The demand curve under monopoly production at less than the social optimum Deadweight loss under monopoly consumer and producer surplus consumer surplus producer surplus total surplus Market Failures: Monopoly Power

Deadweight loss under monopoly : 

O £ Q AR = D Consumer surplus Producer surplus Deadweight loss under monopoly MC (= S under perfect competition) (a) Industry equilibrium under perfect competition

Market Failures: Monopoly Power : 

The demand curve under monopoly production at less than the social optimum Deadweight loss under monopoly consumer and producer surplus consumer surplus producer surplus total surplus the effect of monopoly on total surplus Market Failures: Monopoly Power

Deadweight loss under monopoly : 

O £ Q Ppc Qpc AR = D a Consumer surplus Producer surplus Deadweight loss under monopoly MC (= S under perfect competition) (b) Industry equilibrium under monopoly

Deadweight loss under monopoly : 

O £ Q AR = D Consumer surplus Producer surplus MC (= S under perfect competition) (a) Industry equilibrium under perfect competition Deadweight loss under monopoly

Deadweight loss under monopoly : 

O £ Q Ppc Qpc AR = D a Consumer surplus Producer surplus MC (= S under perfect competition) (b) Industry equilibrium under monopoly Deadweight loss under monopoly

Market Failures: Monopoly Power : 

The demand curve under monopoly production at less than the social optimum Deadweight loss under monopoly consumer and producer surplus consumer surplus producer surplus total surplus the effect of monopoly on total surplus Other problems with monopoly Market Failures: Monopoly Power

Market Failures: Monopoly Power : 

The demand curve under monopoly production at less than the social optimum Deadweight loss under monopoly consumer and producer surplus consumer surplus producer surplus total surplus the effect of monopoly on total surplus Other problems with monopoly Possible advantages from monopoly Market Failures: Monopoly Power

Other Market Failures : 

Other Market Failures Ignorance and uncertainty Immobility of factors and time lags Protecting people's interests dependants the principal–agent problem the problem of asymmetric information the need for monitoring poor economic decision making by people merit goods Macroeconomic goals Economists and policy advice

Government Intervention: Taxes and Subsidies : 

Government Intervention: Taxes and Subsidies The use of taxes and subsidies to correct externalities the optimum size of a tax

Using taxes to correct a market distortion : 

O Costs and benefits Quantity Using taxes to correct a market distortion

Using taxes to correct a market distortion : 

O MC = S D P MSC Costs and benefits Quantity Q1 Using taxes to correct a market distortion

Using taxes to correct a market distortion : 

Q1 O P Costs and benefits Quantity MC = S MSC D Using taxes to correct a market distortion

Government Intervention: Taxes and Subsidies : 

The use of taxes and subsidies to correct externalities the optimum size of a tax the optimum size of a subsidy Government Intervention: Taxes and Subsidies

Using subsidies to correct a market distortion : 

O D P MC = S Q1 Costs and benefits Quantity Using subsidies to correct a market distortion

Using subsidies to correct a market distortion : 

O MSC D P Costs and benefits Quantity MC = S Using subsidies to correct a market distortion

Using subsidies to correct a market distortion : 

O P Q2 Q1 Costs and benefits Quantity MSC MC = S D Using subsidies to correct a market distortion

Government Intervention: Taxes and Subsidies : 

The use of taxes and subsidies to correct for monopoly use of lump-sum taxes Advantages of taxes and subsidies Disadvantages of taxes and subsidies infeasible to use different tax and subsidy rates lack of knowledge Government Intervention: Taxes and Subsidies

Government Intervention: Laws and Regulation : 

Government Intervention: Laws and Regulation The use of laws and regulation Advantages of legal restrictions simple to understand safer when size of problem is potentially great quick to implement a good way of dealing with imperfect information Disadvantages of legal restrictions a 'blunt weapon'

Government Intervention: Laws and Regulation : 

Types of regulation The system of regulation in the UK UK regulatory bodies price-cap regulation the RPI–X formula Advantages of the UK system discretionary flexible incentive for firms to reduce costs Disadvantages of the UK system Government Intervention: Laws and Regulation

Other Forms of Government Intervention : 

Other Forms of Government Intervention Changes in property rights the problem of limited property rights extending property rights limitations of this solution impractical in many situations problems of litigation questions of equity Provision of information consumer information information on jobs information to firms

Other Forms of Government Intervention : 

Other Forms of Government Intervention Direct provision of goods and services the provision of public goods the need to evaluate costs and benefits of publicly provided goods the provision of other goods and services by the government social justice large positive externalities dependants ignorance

More or Less Intervention? : 

More or Less Intervention? Drawbacks of government intervention shortages and surpluses poor information bureaucracy and inefficiency lack of market incentives shifts in government policy lack of freedom for the individual

More or Less Intervention? : 

More or Less Intervention? Advantages of the free market automatic adjustments dynamic advantages of capitalism possibly high degree of competition even under monopoly/oligopoly Judging the arguments Should there be more or less intervention in the market? important to consider both costs and benefits of intervention moral issues problem of predicting effects of intervention

The Environment: a Case Study : 

The Environment: a Case Study The environmental problem global and local environmental problems causes of the problems Market failures environment as a common resource externalities ignorance inter-generational problems

The Environment: a Case Study : 

The Environment: a Case Study Policy alternatives charging for use of the environment emissions charges

An emissions charge : 

L1 Level of emission Costs and benefits (£) P1 = 0 An emissions charge

The Environment: a Case Study : 

The Environment: a Case Study Policy alternatives charging for use of the environment emissions charges user charges

The Environment: a Case Study : 

The Environment: a Case Study Policy alternatives charging for use of the environment emissions charges user charges optimum charge = external cost

The Environment: a Case Study : 

The Environment: a Case Study Policy alternatives charging for use of the environment emissions charges user charges optimum charge = external cost green taxes and subsidies

The Environment: a Case Study : 

The Environment: a Case Study Policy alternatives charging for use of the environment emissions charges user charges optimum charge = external cost green taxes and subsidies use of such taxes around the world

Slide 58: 

Green tax revenues as a % of GDP

Slide 59: 

Green tax revenues as a % of GDP

The Environment: a Case Study : 

The Environment: a Case Study Policy alternatives charging for use of the environment emissions charges user charges optimum charge = external cost green taxes and subsidies use of such taxes around the world laws and regulations

The Environment: a Case Study : 

The Environment: a Case Study Policy alternatives charging for use of the environment emissions charges user charges optimum charge = external cost green taxes and subsidies use of such taxes around the world laws and regulations advantages and disadvantages

The Environment: a Case Study : 

The Environment: a Case Study Policy alternatives charging for use of the environment emissions charges user charges optimum charge = external cost green taxes and subsidies use of such taxes around the world laws and regulations advantages and disadvantages education

The Environment: a Case Study : 

The Environment: a Case Study Policy alternatives charging for use of the environment emissions charges user charges optimum charge = external cost green taxes and subsidies use of such taxes around the world laws and regulations advantages and disadvantages education tradable permits

The Environment: a Case Study : 

The Environment: a Case Study Policy alternatives charging for use of the environment emissions charges user charges optimum charge = external cost green taxes and subsidies use of such taxes around the world laws and regulations advantages and disadvantages education tradable permits advantages and disadvantages

The Environment: a Case Study : 

The Environment: a Case Study How much can we rely on governments? governments must have the will to protect the environment depends on attitudes of various interest groups must be able to identify problems and appropriates solutions when problems are global: may require international agreements governments are likely to be more concerned with their own national interests