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REM 621 TOPIC 4: MARKET STRUCTURE AND MARKET FAILURE

REM 621 TOPIC 4: MARKET STRUCTURE AND MARKET FAILURE. Market Structure & Market Power. Price Takers. Price Makers. Competitive Markets. Monopoly Oligopoly. Requirements for Proper Functioning Market (Perfect Competition) Large number of buyers and sellers (ie. price takers)

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REM 621 TOPIC 4: MARKET STRUCTURE AND MARKET FAILURE

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  1. REM 621TOPIC 4: MARKET STRUCTURE AND MARKET FAILURE

  2. Market Structure & Market Power Price Takers Price Makers Competitive Markets Monopoly Oligopoly

  3. Requirements for Proper Functioning Market (Perfect Competition) • Large number of buyers and sellers (ie. price takers) • Perfect information about current and future prices, products available, etc. • All economic agents behave rationally; producers maximize profits and consumers maximize their satisfaction or "utility" • Market prices reflect full costs of production and consumption • Inputs being supplied and goods being produced are individually owned and divisible; thus, property rights exist

  4. Market Failure • Externalities • Lack of Property Rights • Public Goods • Imperfect Information

  5. Negative Externality Ss P Sm Ps Pm Externality D Qs Qm Q

  6. Source: Bromley, 1989a

  7. Types of Goods & Services as Characterized by Rivalry and Exclusivity

  8. Common Pool Resource and Open Access (Market) $ per unit MC = Spc AVC = Soa ppc poa Demand Qpc Qoa Output

  9. Public Goods Individual A Demand Curve Individual B Demand Curve Market Demand Curve P P P Consumer Surplus Market Price QA QB QT Q Q Recall the individual’s and market demand curves for a normal good ..

  10. Public Good and Aggregate Marginal Willingness to Pay P Note: we now sum vertically across individuals (totalling prices for a given quantity), instead of horizontally (totalling quantities at a given price) Market - MWTP Same distance B - MWTP A - MWTP Q

  11. Worked Example - Individual/Aggregate Demand for Lowering Lake Pollution

  12. 125 100 75 50 25 125 100 75 50 25 Homeowner A Homeowner C 4 3 2 1 0 4 3 2 1 0 250 200 150 100 50 125 100 75 50 25 MC Homeowner B D 4 3 2 1 0 4 3 2 1 0

  13. Imperfect Information • Asymmetric information problems: • Adverse selection occurs when a "bad" result occurs because "bad" products or customers are more likely to apply or be selected • Moral hazard occurs when a party insulated from risk behaves differently than it would behave if it were fully exposed to the risk • Principle-agent problem is similar but focuses on incentives in employer-employee type relationships, e.g. bureaucrat-as-agent deviates from the intentions of the legislators

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