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Private vs. Social costs

Private vs. Social costs. Divergences Market prices do not reflect opportunity costs Private = market prices Social = opportunity costs to society. Reasons for Divergences. Market Failures Market power Externalities Public goods Missing markets Incomplete property rights

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Private vs. Social costs

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  1. Private vs. Social costs Divergences • Market prices do not reflect opportunity costs • Private = market prices • Social = opportunity costs to society

  2. Reasons for Divergences • Market Failures • Market power • Externalities • Public goods • Missing markets • Incomplete property rights • Distortions – result of policies that affect prices of commodities or factors • Commodity taxes/subsidies • Marketing restrictions/regulations • Taxes on economic activities • Etc.

  3. Market analysis of divergences • Need to consider effects on • Consumers (CS) • Producers (PS) • Government budget (B) • External effects or third-party costs (EE)

  4. Examples of market analysis • Market failures • Market power • Externalities • Market distortions (policies) • Domestic markets (no trade) • Commodity taxes/subsidies • Quantitative restrictions • International trade (small country) • International trade (large country)

  5. Welfare Effects of Negative Externality CS0=abc PC0=dbg a Ss PS0=cbd EE0=0 m Sp CS1=akh b c P0 PC1=fhl h j k P1 PS1=khf EE1 =-dmhf ∆CS=+cbhk D ∆PS=+djhf - cbjk d ∆EE=-dmhf f g l ∆Net=-bmh Q0 Q1

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