AGEC/FNR 406 LECTURE 3. Tomatoes for sale in a rural Indonesian market. Markets and market failure. Lecture Goals:. 1. Introduce concept of “market failure”.
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AGEC/FNR 406 LECTURE 3
Tomatoes for sale in a rural Indonesian market
1. Introduce concept of “market failure”
2. Identify key reasons why markets sometimes fail to achieve socially optimal outcomes.
A place where BUYERS and SELLERS come together to express… …willingness to purchase goods
… willingness to sell goods
This process of EXCHANGE leads to the identification of economic value.
Some values apply to stocks, some to flows!
reading LECTURE 3
5. Imperfect competition
2. Public goods
3. Imperfect information
4. Inappropriate government intervention
An externality is an unintended side-effect of production or consumption. An externality may be either beneficial or harmful. In either case, the market price does not reflect the spillover impact.An example is pollution, as when damages associated with a production process are not included in the market price of the good.
A public good is nonrival and nonexcludable in consumption. My enjoyment does not detract from your enjoyment, and once provided, access to the good cannot be restricted.Incentives for private provision of public goods are low, and they tend to be underprovided by the market.
0 Degree of nonrivalry 100%
Fish in a lake
0 Degree of nonexcludability 100%
Imperfect information describes the situation in which firms or consumers are unaware of the impacts of their actions.It does not include cases in which agents deliberately ignore information.Examples include health risks due to exposure to toxic substances, or global environmental effects of human activity.
If the government intervenes in a market in a way that affects the market price and moves it away from the socially efficient price, then the outcome is a market failure. An example cited in the textbook is that of roads provided by the US Forest Service, which may reduce the cost of timber extraction for private timber companies who lease public land.
Under imperfect competition the market price does not reflect the true value of a good to society. This is the case because of firm behavior.The most frequently cited case is a monopoly (a single producer) that restricts output in order to raise the price.