1 / 43

Market Failures

Market Failures. The role of government and economics is to enhance public welfare. Both seek to allocate scarce resources among alternative desirable ends When the market fails to allocate goods adequately, then the government should step in. Three questions.

wynter-conrad
Download Presentation

Market Failures

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Market Failures

  2. The role of government and economics is to enhance public welfare • Both seek to allocate scarce resources among alternative desirable ends • When the market fails to allocate goods adequately, then the government should step in

  3. Three questions • What are the desirable ends towards which society should allocate its scarce resources? • What are these scarce resources, and what are their characteristics relevant to allocation?  • Based on the nature of the scarce resources and human nature, what allocative mechanisms is best for achieving these desired ends? • What allocative mechanisms are available?

  4. The desirable ends: what improves social welfare? • Is it ever greater consumption of market goods? • Can you buy and sell clean water, clean air, stable climate, biodiversity, ozone layer? • Why are we so obsessed with growth? • Does sustainability matter? • Does distribution matter? • Who should own goods and services created by nature and by society? • Is stability desirable?

  5. What are the scarce resources? • Economic goods and services • Ecosystem goods and services • Laws of thermodynamics • 1st law: matter energy is constant • You can’t make something from nothing • Economics is transformation, not waste • 2nd law: entropy increases in an isolated system (supreme law of nature) • Economic activity results in waste • Economy can’t grow forever. We can’t grow our way out of poverty

  6. From Empty World to Full World

  7. What are the characteristics of the scarce resources?

  8. Excludability • Excludable resource regime • One person can prevent another from using the resource • Necessary for markets to exist • Non-excludable • No enforceable property rights due to technology or social institutions • Can’t charge for use • Some resources non-excludable by nature. None are inherently excludable. • Excludability is a product of institutions.

  9. Rivalness • Rival Goods • My use leaves less for you to use • All ecosystem goods are rival • Non-rival (or non-depletable) • My use does not leave less for you to use • Marginal cost for additional user = 0 • Efficient allocation: Price = marginal cost of production • All non-rival resources are services • Rival or non-rival is an innate characteristic of the good, not a result of institutions

  10. Rivalness (cont.) • Non-rival but congestible • Non-rival as long as few people use it, becomes rival with excessive use (e.g. roads) • Empty planet vs. full planet

  11. So What? Excludable Non-Excludable Market Good: cars, houses, land, oil, timber, waste absorption capacity? Open Access Regime: Oceanic fisheries, undiscovered minerals, waste absorption capacity Rival Potential market goodbut inefficient: patented information, e.g. energy efficiency, toll roads. Pure Public Good: Information, streetlights, public roads, defense, laws, public health, most ecosystem services Non-rival OAR when crowded: e.g. public parks, beaches, roads, bridges, etc. MG when crowded: toll roads at rush hour, toll bridges, beaches, etc. Non-rival, congestible

  12. Open Access • The “Tragedy of the commons” • Common property vs. open access • Individuals try to capture benefits for themselves, share costs with society • Market alone leads to over-exploitation • Threat of extinction • Loss of profit (to be explained later) • Role for government to step in

  13. Non-rival & Excludable • Patents are protected by governments • Why do we have patents? • Patents, profit motive and innovation • When did patents come about? • 1790s in US • 1947 international, rarely used before 1980s

  14. Non-rival & Excludable (cont.) • Patents and the WTO • 97% owned by developed nations • Neem tree, steel drums, etc. • Samuel Slater, “Father of American industry” • Should government spend scarce resources to make these information excludable?

  15. Public Goods • Free-riding • No price signal as feed-back mechanism • Scarcity  price increase  innovation • Lack of Incentives for market to produce them • Lack of incentives for markets to create technologies that provide them

  16. Public Goods (cont.) • How important are public goods? • Life support functions (Vermont’s forests) • Flood protection (Winooski river) • Water purification • Lake Champlain • Infrastructure • Research and development • if all the scientists are working for profit, none are making PGs • Provision widely accepted as government duty

  17. Is government provision efficient? • Privatization debate • Read chapter on political economy

  18. Market goods: The theory of Externalities

  19. Externalities • Definition • “an activity by one agent causes a loss (gain) of welfare to another agent” • “The loss (gain) of welfare is uncompensated” • Completely Internal to the Economic Process. Why? • How are these related to public goods?

  20. Examples • Individual consumption • Waste outputs • Status effect • Industry • Pollution • Brownfields • Agriculture • Ecosystem conversion- loss of riparian zones • Phosphorous emissions • Siltation • Factory farming

  21. Examples (cont.) • Natural resource harvest • Depletion of ecosystem services • Waste emissions • Community issues • Crime reduction • Economic stability • Education • Health

  22. ‘Optimal’ externalities for society Agricultural production

  23. Property Rights • Who owns the environment? • polluter rights (privilege, no rights) • sufferer rights (rights, duties) • What about future generations?

  24. Obstacles to Optimal • Transaction costs • in absence of transaction costs, no negative externalities • What are transaction costs likely to be for externalities affecting public goods? • Wealth effect • Intergenerational externalities

  25. Government role • What can the government do about externalities, and how does it relate to finance? • Regulations • Cost money to enforce

  26. Government role • What can the government do about externalities, and how does it relate to finance? • Regulations • Cost money to enforce • Economically inefficient • No incentives to go beyond compliance • Taxes • Auctioned quotas

  27. Controlling price or quantity

  28. Marginal pollution abatement costs for three firms emitting 5000 tons of pollution each.

  29. Pigouvian taxes and subsidies • Tax (subsidy) equal to value of negative (positive) externality theoretically leads to efficient outcome • What is value of externality? • Incentives

  30. Tradable quotas • Example of sulfur dioxide • First determine scale • Next decide on distribution • Justice vs. feasibility • Allow market to allocate

  31. Tax or quota? • With a tax, you can theoretically get right amount, but amount will change with economic change. Better to let prices vary (economic) than amount of resource to be used (ecological) • tax or quota on single resource leads to substitution, on all resources will not

  32. Tax or quota • Uncertainty • We don’t know marginal abatement cost curves, nor marginal benefit curves • not only do we not know where we are on the curve, we don’t know the slope of the curve • Slope of curve very important • In full world, lower risks from quotas, in empty world, lower risks from tax

  33. Ignorance and Uncertainty • Perfect markets require perfect information • Asymmetric information • Nobel Prize in 2000 • Poverty insurance • Irreducible ignorance • Time lags • Ecosystem function

  34. How do ignorance and uncertainty relate to budgeting and finance? • Who pays clean up costs when unexpected negative impacts occur? • Health impacts • Superfund sites • Role of government in providing social security (poverty insurance)

  35. Natural Monopoly • High fixed cost, low marginal cost • Roads • How should hey be regulated?

  36. Conclusions • Many market economists and politicians argue that there is little role for government, market is best allocative mechanism • Market systematically fails to provide many goods • Government is essential • Future lectures will examine just and efficient mechanisms for coping with these market failures

  37. Naural Monopolies,

  38. PG: the Privatization debate

  39. Private Provision • Examples • 3 private police for every public officer in US • 2/3 of homes in Denmark with private fire service • SUVs or plowed roads? • Relative costs • Administrative costs • Diversity of tastes • Distributional issues • Skimming

  40. Private Production: examples • Skating rink in Central park • Trains in WWI • Military personnel in Iraq • Airport security • Municipal water supply • Education

  41. Private Production : issues • Examples • Skating rink in Central park • Trains in WWI • Military personnel in Iraq • Airport security • Municipal water supply • Education

More Related