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Presented by Zeng Weihong Date: 28 th , Feb, 2003

Presented by Zeng Weihong Date: 28 th , Feb, 2003. Market Failure. Review. 1.Pareto Optimal/Efficient: Resource allocations that have the property that no one can be made better off without someone being made worse off are said to be Pareto optimal.

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Presented by Zeng Weihong Date: 28 th , Feb, 2003

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  1. Presented by Zeng Weihong Date: 28th, Feb, 2003 Market Failure

  2. Review 1.Pareto Optimal/Efficient: Resource allocations that have the property that no one can be made better off without someone being made worse off are said to be Pareto optimal.

  3. 2. How can the market obtain Pareto Optimal? • The strict assumptions: • Utility functions of all consumers • Production functions of all producers • Consumption quantity of all individuals • Input and output quantity of all producers • Market supply and demand curves

  4. Focus Questions 1. What are the principal reasons why market fails to produce efficient outcomes? 2. Is there any example of basic market failure? What are they? 3. Why might the government intervene in the market’s allocation of resources? 4. Through what measurement for the government to intervene the market?

  5. Imperfect competition Public goods Externalities Incomplete markets Imperfect information Unemployment and other macroeconomic disturbances ZengWeihong: Six Basic Market Failure

  6. Imperfect competition such as: Monopoly or oligopoly. Government patents Monopoly pricing 1. Failure of Competition P MC Q Qm Qc

  7. 2. Public Goods Two Questions 1. Does the good have the property of rival consumption? No. Non-rival consumption. 2. Is it possible to exclude any individual from the benefits of the good? No. Non-excludability.

  8. Pure and impure public Goods Marginal Cost of use Pure Private Goods Health Services, Education Congestedhighway PurePublic Good National Defense Fire Protection Easeof Exclusion

  9. Underconsumption and Undersupply • How a user fee can result in underconsumption? Price (Toll) Demand Curve for trips p Qe Qm Number of trips taken

  10. 3. Externalities Whenever an individual or firm undertakes an action that has an effect on another individual or firm , for which the latter does not pay or is not paid, we say there is an externalities. Positive externalities Negative externalities

  11. Solutions to externalities Public sector solutions Private solutions Fines and taxes Subsidizing pollution abatement Marketable permits Regulation Internalize externality Assign property rights Use the legal system

  12. Insurance and capital markets Health insurance Unemployment insurance Student loan Complementary markets Coffee and sugar case Acting alone Acting together 4. Incomplete Market

  13. 5. Information Failures Inadequate supply of information Health insurance Research and Development (R&D)

  14. 6. Unemployment, Inflation, and Disequilibrium • Unemployment both of workers and machines. • Inflation

  15. Focus Questions 1. What are the principal reasons why market fails to produce efficient outcomes? 2. Is there any example of basic market failure? What are they? 3. Why might the government intervene in the market’s allocation of resources? 4. Through what measurement for the government to intervene the market?

  16. REFERENCES • J.E.Stiglitz, Economics of the public sector, Third Edition, w. w.Norton and Company,Inc, 2000. • A.B.Atkinson and J.E.Stiglitz, Public Economics, McGRAW-HILL Book Company Limited, 1980. • J.E.Stiglitz, Whither socialism?, The MIT press, London,1994.

  17. END

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