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Economics in Policy Analysis

Economics in Policy Analysis. Market failure II. Market failures. Externalities Monopoly -- Public goods -- Information asymmetry. Public goods. Non-excludable: it is not possible to exclude individuals from the good's consumption

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Economics in Policy Analysis

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  1. Economics in Policy Analysis Market failure II

  2. Market failures • Externalities • Monopoly --Public goods -- Information asymmetry

  3. Public goods • Non-excludable: it is not possible to exclude individuals from the good's consumption • Non-rival: consumption of the good by one individual does not reduce the amount of the good available for consumption by others

  4. Public goods

  5. Public goods

  6. Public goods

  7. Public goods

  8. Public goods What is the problem? Free-rider problem!

  9. Public good: free rider problem Aggregating demands: private goods public good Ex: fixing private property vs communal property

  10. P P* D3 D1 D2 3 5 7 Q Aggregating demands: private

  11. D total P P D3 D1 D2 3 5 7 15 Q Aggregating demands: private

  12. P P D1 D3 D2 3 5 7 Q Aggregating demands (public)

  13. P 10 D3 3 D1 D2 1 3 5 7 Q Aggregating demands (public)

  14. P 14 10 D3 3 D1 D2 1 7 Q Aggregating demands (public)

  15. P 14 10 D3 3 D1 D2 1 3 5 7 Q Aggregating demands (public)

  16. P 15 10 D3 3 D1 D2 2 3 5 7 Q Aggregating demands (public)

  17. P 15 10 D3 3 D1 D2 2 3 5 7 Q Aggregating demands (public)

  18. P 15 10 D3 3 D1 D2 2 3 5 7 Q Aggregating demands (public)

  19. Policy responses to public good problems?

  20. Policy responses to public good problems? • Government provision • Government funding but private provision • …

  21. Information asymmetry Search goods: consumers can determine its characteristics with certainty prior to purchase Experience goods: consumers can determine its characteristics only after purchase

  22. P S Pw Pr D observed D true Qr Qw Q Information asymmetry (negative)

  23. P S Pr Pw D true D observed Qw Qr Q Information asymmetry (positive)

  24. Market failures • Externalities • Monopoly • Public goods • Information asymmetry

  25. Mandatory Testing for Mad Cow Disease in Cattle Government Suit against Tobacco Firms (over hiding health impacts) US Subsidies of Lumber Production and Exports. Government Funding of Stem-Cell Research. Affirmative action policies. Rules to protect wetlands from development. Establishing a certification for organic foods. Should the Federal Government pay Amtrak’s deficits (~$3 Billion) Is this a response to a Market Failure?

  26. P S a Pr e b d Pw D right c D wrong Qw Qr Q Information asymmetry (positive)

  27. P S Pw Pr D wrong D right Qr Qw Q Information asymmetry (negative)

  28. P S a Pw b d Pr e D wrong c D right Qr Qw Q Information asymmetries (negative)

  29. P S a Pw b d Pr e D wrong c f D right Qr Qw Q Information asymmetries (negative) (CS)

  30. P S a Pw b d Pr e D wrong c f D right Qr Qw Q Information asymmetries (negative) (CS)

  31. P S a Pw b d Pr e D wrong c f D right Qr Qw Q Information asymmetries (negative) (CS)

  32. Information asymmetries Policy response:

  33. Policy responses to insufficient information • Civil laws (consumer protection regulation) • Directs information provision (e.g. accreditation, licensing) • Indirect information (encourage consumer reports)

  34. When should government intervene to correct asymmetric information? • Public interest in quality of good (food security vs shoes) • Nature of the product (house vs chocolate bar) - frequency of purchase - cost of wrong information

  35. Higher education and public policy • Public good? • Externalities? • Natural monopoly? • Information asymmetry?

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