KOOTHS | BiTS: Economic Policy and Market Regulation (winter term 2013/2014), Part 2 1 Economic Policy and Market Regulation Part 2 Dr. Stefan Kooths BiTS Berlin (winter term 2013/2014)

KOOTHS | BiTS: Economic Policy and Market Regulation (winter term 2013/2014), Part 2 2 Outline 1.Introduction and Overview 2.Market Mechanisms and Government Interventions Market-based coordination and welfare economics Price controls Taxes 3.Externalities and Public Goods 4.Competition Policy and Regulation 5.Ordoliberalism and the Social Market Economy 6.Summary: The Key Lessons Learnt

KOOTHS | BiTS: Economic Policy and Market Regulation (winter term 2013/2014), Part 2 3 Pareto efficiency

KOOTHS | BiTS: Economic Policy and Market Regulation (winter term 2013/2014), Part 2 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

KOOTHS | BiTS: Economic Policy and Market Regulation (winter term 2013/2014), Part 2 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)

KOOTHS | BiTS: Economic Policy and Market Regulation (winter term 2013/2014), Part model: Two consumers, two products, two factors

KOOTHS | BiTS: Economic Policy and Market Regulation (winter term 2013/2014), Part 2 7 Criteria 1: Efficiency of exchange (Edgeworth box and contract curve)

KOOTHS | BiTS: Economic Policy and Market Regulation (winter term 2013/2014), Part 2 8 Criteria 2: Efficiency of factor use (efficiency line and production-possibility frontier)

KOOTHS | BiTS: Economic Policy and Market Regulation (winter term 2013/2014), Part 2 9 Criteria 3: Optimal composition of production (consumer sovereignty)

KOOTHS | BiTS: Economic Policy and Market Regulation (winter term 2013/2014), Part 2 10 Equilibrium: Market clearing and social welfare

KOOTHS | BiTS: Economic Policy and Market Regulation (winter term 2013/2014), Part 2 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

KOOTHS | BiTS: Economic Policy and Market Regulation (winter term 2013/2014), Part 2 12 The markets navigation system: Prices as universal information carriers

KOOTHS | BiTS: Economic Policy and Market Regulation (winter term 2013/2014), Part 2 13 Static and dynamic efficiency

KOOTHS | BiTS: Economic Policy and Market Regulation (winter term 2013/2014), Part 2 14 Primary income distribution

KOOTHS | BiTS: Economic Policy and Market Regulation (winter term 2013/2014), Part 2 15 Flexible adjustment to changing conditions

KOOTHS | BiTS: Economic Policy and Market Regulation (winter term 2013/2014), Part 2 16 Technological progress

KOOTHS | BiTS: Economic Policy and Market Regulation (winter term 2013/2014), Part 2 17 Perfect competition and reality: Nirvana critique and the theory of second best

KOOTHS | BiTS: Economic Policy and Market Regulation (winter term 2013/2014), Part 2 18 Market prices, revealed preferences and the impossibility of calculation under Socialism (Mises)

KOOTHS | BiTS: Economic Policy and Market Regulation (winter term 2013/2014), Part 2 19 Potential market failures and economic policy

KOOTHS | BiTS: Economic Policy and Market Regulation (winter term 2013/2014), Part 2 20 Outline 1.Introduction and Overview 2.Market Mechanisms and Government Interventions Market-based coordination and welfare economics Price controls Taxes 3.Externalities and Public Goods 4.Competition Policy and Regulation 5.Ordoliberalism and the Social Market Economy 6.Summary: The Key Lessons Learnt

KOOTHS | BiTS: Economic Policy and Market Regulation (winter term 2013/2014), Part 2 21 Price ceilings and market outcomes (example: rent controls)

KOOTHS | BiTS: Economic Policy and Market Regulation (winter term 2013/2014), Part 2 22 Price floors and market outcomes (example: minimum wages)

KOOTHS | BiTS: Economic Policy and Market Regulation (winter term 2013/2014), Part 2 23 Escaping price controls

KOOTHS | BiTS: Economic Policy and Market Regulation (winter term 2013/2014), Part 2 24 Outline 1.Introduction and Overview 2.Market Mechanisms and Government Interventions Market-based coordination and welfare economics Price controls Taxes 3.Externalities and Public Goods 4.Competition Policy and Regulation 5.Ordoliberalism and the Social Market Economy 6.Summary: The Key Lessons Learnt

KOOTHS | BiTS: Economic Policy and Market Regulation (winter term 2013/2014), Part 2 25 Taxes on sellers

KOOTHS | BiTS: Economic Policy and Market Regulation (winter term 2013/2014), Part 2 26 Taxes on buyers

KOOTHS | BiTS: Economic Policy and Market Regulation (winter term 2013/2014), Part 2 27 Elasticity and tax incidence: Who really pays the tax?

KOOTHS | BiTS: Economic Policy and Market Regulation (winter term 2013/2014), Part 2 28 Excess burden (deadweight loss) of taxation

KOOTHS | BiTS: Economic Policy and Market Regulation (winter term 2013/2014), Part 2 29 The Laffer curve: Tax rates vs. tax revenues

KOOTHS | BiTS: Economic Policy and Market Regulation (winter term 2013/2014), Part 2 30 Administrative burden

KOOTHS | BiTS: Economic Policy and Market Regulation (winter term 2013/2014), Part 2 31 Marginal tax rates vs. average tax rates

KOOTHS | BiTS: Economic Policy and Market Regulation (winter term 2013/2014), Part 2 32 Lump-sum taxes

KOOTHS | BiTS: Economic Policy and Market Regulation (winter term 2013/2014), Part 2 33 Principles of taxation: Benefits vs. ability-to-pay Benefits principle Ability-to-pay principle »Horizontal equity »Vertical equity