KOOTHS | BiTS: Economic Policy and Market Regulation (winter term 2013/2014), Part 2 1
Economic Policy and Market Regulation
Part 2
Dr. Stefan KoothsBiTS Berlin
(winter term 2013/2014)www.kooths.de/bits-ep
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 2 6
2-2-2 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