MARKET GOVERNMENT GOVERNMENT FAILURE INTERVENTION FAILURE EXTERNALITY -PUBLIC GOODS MARKET POWER INEQUITIES DYNAMIC MKT. FAIL. INDIVISIBILITY INFORMATION ASYMMETRY

EXTERNALITIES: impacts on third parties besides the buyer and seller. CONSUMPTION EXTERNALITIES: impacts on third parties as a result of the consumption of a good. =>Divergence of social and private demand PRODUCTION EXTERNALITIES: impacts on third parties as a result of the production of a good. =>Divergenece of social and private supply

MARKET POWER: a downward sloping demand curve from the point of view of the seller; the power over the market price. includes: MONOPOLY, OLIGOPOLY, MONOPOLISTIC COMPETITION, MONOPSONY, OLIGOPSONY, BILATERAL OLIGOPOLY, AND BILATERAL MONOPOLY.

DYNAMIC MARKET FAILURE: the failure through time to achieve technological change and the failure of the market to achieve stable, equilibrium outcomes. examples: - Stagnation - Lack of technological change. -The cobweb problem

DEAD WEIGHT WELFARE LOSS OF MONOPOLY DEMAND MARGINAL REVENUE MARGINAL COST Monopoly Case (MC=MR) Competitive Case (MC=P) transferred to producer A B C D Loss to Consumers (B) +Loss to Producers (C) =WELFARE LOSS CFCs (Millions of pounds per year) Price

THE IMPACT OF EXTERNALITIES PRIVATE DEMAND MARGINAL COST CFCs (Millions of pounds per year) Price PRIVATE MARKET EQUILIBRIUM PRICE SOCIALLY OPTIMAL PRICE SOCIAL DEMAND SOCIALLY OPTIMAL OUTPUT OUTPUT AT PRIVATE MARKET EQUILIBRIUM

MEASUREMENT OF BENEFIT Supply WITHOUT CFC Regulation Supply WITH CFC Regulation Demand Price of Fish Fish (tons per year) INCREMENTAL BENEFIT OF CURBING POLLUTION

Social Costs and Benefits * Base used for comparison for computring benefits and costs of phasing out CFCs ** Hypotehtical

SOCIAL COSTS AND BENEFITS Incremental Social Benefit Incremental Social Cost

COBWEB MODEL Ao A1 A2 A3 Bo B1 B2B3 CHEMICALS (millions of pounds/year) Price Such a low price provides no incentive to produce any product at all.

WHAT PREVENTS THE UNSTABLE CYCLE? - MORE INELASTIC SUPPLY - A LONG TIME HORIZON - INSTANTANTANEOUS FEEDBACK ABOUT PRICES - IMMEDIATE ADJUSTMENT OF PRODUCTION - COUNTERCYCLICAL INVENTORY POLICY (requiring storable goods) - EXTRA CAPACITY - MARKET POWER - COMMUNICATION, PLANNING OF MEMBERS IN MARKET. INFORMATION ON MARKET - MARKETS THAT ALLOW SPECULATION AGAINST UNSTABLE BEHAVIOR

Quintiles Based on Per Capita Income

Cumulative % of: Coun- GNP tries WORLD INCOME DISTRIBUTION

LINE OF EQUALITY USA WORLD

COSTS OF DECISIONS External Costs of Excluding People from Decision Minimum Cost Internal Costs of Gaining Decision Total of Internal & External Costs Dictatorship (0%) Majority (50%) Unanimity (100%) PERCENT OF PEOPLE REQUIRED FOR DECISION $ OF COST

GOVERNMENT STUDIES

MARKET GOVERNMENT GOVERNMENT FAILURE INTERVENTION FAILURE EXTERNALITY PUBLIC ENTERPRISE ADMINISTRATIVE -PUBLIC GOODS-NATIONALIZATION COST MARKET -PRIVATIZATION COMPLIANCE POWER REGULATION COST INEQUITIES - OUTPUT EFFICIENCY COST DYNAMIC - PRICE - NEGATIVE EXTER. MKT. FAIL. - STANDARDS -PUBLIC BADS INDIVISIBILITY ANTITRUST - MKT POWER INFORMATION -STRUCTURE - INEQUITIES ASYMMETRY -CONDUCT - DYNAMIC TAXES (SUBSIDIES) - INDIVISIBILITY PROVISION OF - INFORMATION INFORMATION RATIONING (MONEY)