revision notes fr market failure
TRANSCRIPT
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8/7/2019 revision notes fr market failure
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Revision Notes for Market Failure
Type (A): Externality + Imperfect knowledge and/ or equityPart (a): Explanation of the various sources of market failureIntroduction
Scarcity (unlimited wants + limited resources)
Need to allocate resources efficiently.
How? Economic efficiency (comprised of productive efficiency and allocative efficiency) In the case of market failure, emphasis is on allocative efficiency (MSB=MSC) (define)
In the event if there is misallocation of resources market failure exists (define)Negative Externality (smoking/ traffic congestion/ pollution)
Define negative externality
Define, explain and illustrate MPC and MEC
Divergence between MPC and MSC
Illustrate using a diagram (assuming there is no positive externality)
Explain what happens in an unregulated market and where is the socially optimal level of output
Hence, due to over-consumption/ production results in deadweight lossPositive Externality (education/ housing/ healthcare) Define positive externality
Define, explain and illustrate MPB and MEB
Divergence between MPB and MSB
Illustrate using a diagram (assuming there is no negative externality)
Explain what happens in an unregulated market and where is the socially optimal level of output
Hence, due to under-consumption/ production results in deadweight lossOther sources of market failure could include imperfect knowledge and/ or equity
Define imperfect knowledge
Explain the causes of imperfect knowledge which leads to market failure
Explain equity
Part (b): Discussion of the various policies to tackle the problem of externalityNegative externality
Taxation (explain using a diagram)
Legislation
Moral suasion
Tradable permits (for pollution)
Nationalisation
Positive externality Grants (explain using a diagram)
Subsidies (explain using a diagram)
Legislation
Moral suasion
Limitations/ Evaluations of the policiesPositive Externality
Sweet are the uses of adversity, which like the toad, ugly and venomous, wears yet a precious jewel in hishead
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Revision Notes for Market Failure
Difficult to estimate the level of external benefits level of subsidies/ grants may not be adequate too high a grant/ subsidy may lead to substantial wastage Government may need to impose higher taxes to finance the spending adverse effects on the
economy
For legislation to be effective, there must be some form of monitoring and the costs involvedshould be kept low for the implementation
For moral suasion, the effectiveness of persuasion is not certain since it is voluntary
Negative Externality
Difficult to estimate the amount of tax + there is administrative costs incurred in collecting thetaxes
For tradable permits provides incentives to create and use less polluting technologies + difficultfor government to determine the optimal quantity of pollution
For legislation, cost of intervention may be high because of the administrative costs incurred inmonitoring and enforcing compliance with the legislation
Legislation does not provide incentives for firms to further reduce their external costs
Government may create inefficiencies when they intervene through direct production as it may not
produce the efficient level of output even with nationalization. Besides, the government may nothave adequate resources
For moral suasion, the effectiveness of persuasion is not certain since it is voluntary
Type (B): Market dominance (usually comes in the form of a market structure question)
In the absence of externality allocative efficiency is achieved when P=MC For Monopoly, monopolistic competition and oligopoly, when MR=MC, at the Qe, P>MC under-
allocation of resources allocative efficiency is not achieved market fails Ways to correct this form of market failure price regulations/ legislations/ etc.Type (C): Public Goods
Define public goods Explain non-rivalry and non-excludability
Implications of non-rivalry and non-excludability
o MC=0 P=0 There is no market for this good since the private will not be willing toprovide it for free need for government intervention
o Problem of free-rider people who do not pay for the good can also get to consume it price mechanism fails to provide the producer with an effective means to exclude
people who do not pay from consuming the good the market will not produce theneed for government intervention
Sweet are the uses of adversity, which like the toad, ugly and venomous, wears yet a precious jewel in hishead