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Economic Policy and Market Regulation Part 2

Economic Policy and Market Regulation Part 2. Dr. Stefan Kooths BiTS Berlin (winter term 2013/2014) www.kooths.de/bits-ep. Outline. Introduction and Overview Market Mechanisms and Government Interventions Market-based coordination and welfare economics Price controls Taxes

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Economic Policy and Market Regulation Part 2

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  1. Economic Policy and Market RegulationPart 2 Dr. Stefan Kooths BiTS Berlin(winter term 2013/2014) www.kooths.de/bits-ep

  2. Outline • Introduction and Overview • Market Mechanisms and Government Interventions • Market-based coordination and welfare economics • Price controls • Taxes • Externalities and Public Goods • Competition Policy and Regulation • Ordoliberalism and the Social Market Economy • Summary: The Key Lessons Learnt

  3. Pareto efficiency

  4. Conditions for „perfect“ competition (1/2) • Atomistic market structure • Infinite number of buyers and sellers (no market power) • Price taker/autonomous decisions • Rationality • Consumers/households: Utility maximization • Producers/enterprises: Profit maximization • Self-interest with fair means (no opportunistic behavior) • Homogenous goods (products and factors) • No personal/spatial/physical preferences • No indivisibility • Stationary world • Given resources, constant technology • No growth analysis, no process/product innovations

  5. Conditions for „perfect“ competition (2/2) • World without frictions • Zero transaction costs (no costs for making an exchange of goods) • Perfect factor mobility (unrestricted market entry/exit) • Freedom of choice • No involuntary/compulsory transactions • No technological external effects • Perfect information/total transparency • Full knowledge/free information about alternatives and prices • No uncertainty • Infinite speed of response • Focus on equilibrium analysis • Transactions only at equilibrium prices (no “false” trading)

  6. 2-2-2 model: Two consumers, two products, two factors

  7. Criteria 1: Efficiency of exchange(Edgeworth box and contract curve)

  8. Criteria 2: Efficiency of factor use(efficiency line and production-possibility frontier)

  9. Criteria 3: Optimal composition of production(consumer sovereignty)

  10. Equilibrium: Market clearing and social welfare

  11. Fundamental theorems of welfare economics • Theorem 1:Competitive markets tend toward an efficient allocation of resources (= fulfill criteria 1 to 3) • Theorem 2:Any particular Pareto-efficient outcome can be achieved via lump-sum wealth redistributions and then letting the market take over

  12. The markets’ navigation system:Prices as universal information carriers

  13. Static and dynamic efficiency

  14. Primary income distribution

  15. Flexible adjustment to changing conditions

  16. Technological progress

  17. “Perfect” competition and reality:Nirvana critique and the theory of second best

  18. Market prices, revealed preferences and the impossibility of calculation under Socialism (Mises)

  19. Potential market failures and economic policy

  20. Outline • Introduction and Overview • Market Mechanisms and Government Interventions • Market-based coordination and welfare economics • Price controls • Taxes • Externalities and Public Goods • Competition Policy and Regulation • Ordoliberalism and the Social Market Economy • Summary: The Key Lessons Learnt

  21. Price ceilings and market outcomes (example: rent controls)

  22. Price floors and market outcomes (example: minimum wages)

  23. Escaping price controls

  24. Outline • Introduction and Overview • Market Mechanisms and Government Interventions • Market-based coordination and welfare economics • Price controls • Taxes • Externalities and Public Goods • Competition Policy and Regulation • Ordoliberalism and the Social Market Economy • Summary: The Key Lessons Learnt

  25. Taxes on sellers

  26. Taxes on buyers

  27. Elasticity and tax incidence: Who really pays the tax?

  28. Excess burden (deadweight loss) of taxation

  29. The Laffer curve: Tax rates vs. tax revenues

  30. Administrative burden

  31. Marginal tax rates vs. average tax rates

  32. Lump-sum taxes

  33. Principles of taxation: Benefits vs. ability-to-pay • Benefits principle • Ability-to-pay principle • Horizontal equity • Vertical equity

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