1 / 25

Market Failures

Market Failures. Mr. Bammel. Demand Side Market Failures. Happens when the demand curve does not reflect the consumer’s willingness to pay for a good or service Sometimes this occurs because it is impossible to charge what consumer’s are truly willing to pay for a good or service;.

kohana
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 Mr. Bammel

  2. Demand Side Market Failures Happens when the demand curve does not reflect the consumer’s willingness to pay for a good or service Sometimes this occurs because it is impossible to charge what consumer’s are truly willing to pay for a good or service;

  3. Supply Side Market Failures Happens when the supply curve does not fully display costs in producing a good or service; Basically the market is unable to weigh all costs or benefits in production.

  4. Consumer Surplus The difference b/w the price a consumer is willing to pay and what they actually pay, equilibrium price; Because the consumer only pays the Eprice, the surplus is in how much more they are willing to allocate in terms of their income to that specific product;

  5. Consumer Surplus on the Dcurve

  6. Producer Surplus The difference b/w the actual price producers receive and the maximum acceptable price that consumer would have to pay the producer to make the particular unit or output available (more simply put, the marginal cost to produce the product) Minimum accepted can also be seen as the opportunity cost of choosing not to allocate resources differently;

  7. Producer Surplus on the SCurve

  8. Maximizing Efficiency

  9. Maximum efficiency is where the largest possible consumer and producer surpluses are combined; Total Surplus = Demand Surplus + Producer Surplus

  10. Efficiency Losses (Deadweight Losses) If Quantity is under-produced or over-produced then there is efficiency loss; When under-production occurs, the resources that should have gone to producing this product have gone to producing another product with less utility for society; When over-production occurs, the benefits gained of these units are less than other products that should have been made instead;

  11. Public Goods and Externalities Each individual person will be assigned one of these two types of Market Failures (public goods and externalities); You will be asked to read your section in the text and then create a poster with all the important concepts associated with the topic; You will want to: use graphs, examples, explanations, etc. Your poster should be able to show understanding of the topic you are focusing on. You will be given a quiz grade for the assignment.

  12. Public Goods A Demand side market failuredemand curves fail to represent consumers full willingness to pay for a good or service; not all net benefits are produced (underreported demand) Extreme forms are in public goods b/c markets may fail to produce any of the public good b/c its demand curve may reflect none of the willingness to pay;

  13. Private Good Characteristics • Distinguished by: • Rivalry  one person buys a product and therefore another cannot; • Excludability  sellers can keep those who do not pay from being able to gain utility from it; A competitive market not only allows private goods in the market but allocates resources efficiently (no overproduction or underproduction)

  14. Public Goods Characteristics • Distinguished by • Nonrivalry one person’s use will not keep another person’s consumption from occurring; • Nonexcludability  no effective way of excluding individuals Creates a Free-Rider problem, once a product is produced there will be no effective way to keep it from nonpayers; Free Riding will produce less demand for the product b/c all free riders are not expressed in the market;

  15. Optimal Quantity of a Public Good Government must try to estimate the demand for a public good; Comparing the MB of an added unit of the good against the MC of providing it; What we call Cost-Benefit Analysis; Finding a point of MB = MC;

  16. MC – MB rule Helps analyze which plan provides the maximum excess of total benefits over total costs, societies max net benefits; If the MC of a proposed government program exceeds its marginal benefit, then the proposed public program should not be undertaken; Vice Versa; Economy in government is allocating resources between the private and public sectors and among public goods to achieve maximum net benefit.

  17. Quasi-Public Goods Goods and services that could be produced and delivered in such a way that exclusion would be possible; Could be priced and sold privately, but because benefits would create underproduction the government provides them; Education, streets, police, fire protection, etc.

  18. Public Good Reallocation Process By taxing, the government takes money out of our hands to spend on our own private needs and allocates that spending to public and quasi-public goods;

  19. Externalities When costs or benefits “spillover” to someone other than the immediate buyer or seller; Negative (costs) Externalities  an overproduction of the related product occurs and there is an overallocation of resources to this product; Positive (benefits) Externalities  underproduction and underallocation of resources result when positive externalities are present;

  20. Negative Externalities Supply side market failures; producers not taking into account problem with production; Producers are shifting some of the costs onto someone else, thus their supply line is too far to the right; Supply line is not truly capturing all costs;

  21. Graphing Negative Externalities

  22. Positive Externalities Demand-side market failures; fails to account for all the total benefits of market; Markets, therefore, fail to produce all units for which benefits exceed costs; society misses out on potential net benefits;

  23. Graphing a Positive Externality

  24. Coase Theorem Conceived by Ronald Coase of the University of Chicago; Given: Property ownership is clearly defined, number of people involved is small, and bargaining cost are insignificant; government is not needed for fixing the externality. He believed government should merely encourage individual bargaining; where because self-interest is at stake, a mutual agreement will present itself to the externality;

  25. Government Intervention To help achieve economic efficiency when externalities affect large numbers of people or when community interests are at stake; To counter negative externalities  use legislation limiting the activity and taxes; To counter positive externalities  use subsidies or public goods; Optimal reduction of an externality occurs when society’s MC = MB;

More Related