Market Failure ?

1. Market Failure ? 市場失效 或 市場失靈 ?

2. Pareto Efficiency 巴列圖效率狀態 • Efficiency is attained if it is impossible to reallocate resources to make one gain without causing loss to other. • Corresponding to the 3 basic economic problems in resource allocation, there exists 3 efficiency conditions. • Thereof, what are the definitions and requirements of production efficiency, consumption efficiency and allocative efficiency?

3. Pareto Efficiency-- Production efficiency • Production efficiency is attained if it is impossible to raise the output of any good without reducing the output of others. It requires the goods are produced at the minimum production cost and the marginal costs of firms producing the same good are equal.

4. Pareto Efficiency-- Consumption efficiency • Consumption efficiency is attained if it is impossible to raise total use value(TUV) of any individual without reducing TUV of others. It requires that goods are consumed by individuals with the highest marginal use value(MUV). This happens when MUVs of individuals consuming the same good are equal.

5. Pareto Efficiency-- Allocative efficiency • Allocative efficiency attained as MUV of each good is equal to it marginal revenue. • Hence, Pareto efficiency condition established when • Marginal Use Value = Market Price = Marginal Cost of production

6. Market Failure 市場失效或市場失靈 • Market Failure is the situation in which the invisible hand (看不見的手)(the market mechanism 市場機制or price mechanism 價格機制) fails to allocate resources efficiently without the governmental intervention.

7. Externality 界外影響 • Externality is the situation in which one’s action affects others (in a non-pecuniary way) without compensation. • E.g. traffic congestion, • enjoy the public exhibition free of charge, • air pollution, • enjoy public display of spectacular firework

8. Private cost 私人成本 vs External cost 界外成本 & Social cost 社會成本 或 社會耗費 • Private cost is the cost borne by the decision maker. • External cost is the uncompensated cost borne (承受) by others. • Social cost is the total cost borne by the whole economy. It is equal to the sum of private cost and external cost.

9. Divergence between private cost and social costs 私人成本和社會耗費的分歧 • Divergence between private cost and social costs is the situation in which the private cost is different from the social cost due to the presence of external cost.

10. Private benefit vs External benefit and Social benefit • Private benefit(私人效益) is the benefit obtained by the decision maker. • External benefit (界外效益) is the uncompensated benefit obtained by others. • Social benefit (社會效益) is the total benefit obtained by the whole economy. It is equal to the sum of private benefit and external benefit.

11. Divergence between private and social benefits • Divergence between private and social benefits is the situation in which the private benefit is differed form the social benefit due to the presence of external benefit. (私人效益和社會效益之間的分歧)

12. Private good and Public good • Private good (私享物品) ---- exclusivity in consumption • Public good(共用物品) ---- non-exclusivity in consumption

13. Private good and Public good • Private good (私享物品) is a good of which its consumption by any individual reduces the amount available for others. That is a private good is exclusive in consumption. • Public good (共用物品) is a good of which its consumption by any individual does not reduce the amount available for others. That is a public good is non-exclusive in consumption. It can be consumed concurrently by all individuals.

14. Practical Problem: Concepts of "Public goods" & "Private goods" inspired by the "Bun Festival" held in Cheung Chau • aa1m.mpeg

15. Practical Problem: Concepts of "Public goods" & "Private goods" inspired by the "Bun Festival" held in Cheung Chau • People flocked to the Cheung Chau Island for the Bun Festival, which is held to commemorate those who died in a plague in the 19th century. The festival is dedicated to driving away evil spirits. A street parade was also held on Sunday, 15 May . • This year, the annual Bun Festival organizers in Cheung Chau have decided to revive the tradition of racing up giant bun tower ---- holding the Bun Scrambling Competition. The competition was once banned after the collapse of a bun tower in 1978.

16. Practical Problem: Concepts of "Public goods" & "Private goods" inspired by the "Bun Festival" held in Cheung Chau • (a) The Ritual (太平清醮儀式) and the activities (e.g. the parade 飄色巡遊) thus organized are referred to be "public goods" in economics. Why? • (b) The sweet buns (包山上的平安包) were supposed to cure all illnesses. These buns are referred to be "private goods" in economics. Why?

17. Question to be discussed: • To achieve consumption efficiency, a private good should be consumed by the individual with the highest marginal use value, while a public good should be consumed by all individuals with positive marginal use values. Discuss.

18. Question to be discussed(Ans.) • Private good is exclusive in consumption and once it is consumed by one person it cannot be consumed by others. To achieve consumption efficiency it should be consumed by the individual with the highest MUV (to maximize the TUV of all). • Public good is non-exclusive in consumption. Once it is produced, it can be consumed by all individuals concurrently. To achieve consumption efficiency it should be consumed by all people with the positive MUV.

19. Question to be discussed: • TV broadcast is a public good. What are the problems in its pricing? What are the ways to overcome the problems so that it can be provided privately? Is this situation efficient?

20. Question to be discussed(Ans.) • TV broadcast is non-exclusive in consumption. It is difficult for the producer to identify consumers (TV viewers) and charge them accordingly. Despite the difficulties in pricing, there is no need for the government to intervene. TV broadcast can be provided privately as the cost incurred can be covered by the revenue from advertisement. It seems TV programs provided “free of charge”. No consumers with TV sets are excluded from consumption. However, as MR from advertisement is probably not equal to the sum of MUVs of all the viewers, the provate optimum (=MR=MC of production) is different from the social optimum. (ΣMUV=MC). Yet, if transaction costs are taken into account, the equilibrium is still established( efficiency is still set up).