ECON_ Market Failures
ECON_ Market Failures ECON 224 002
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This 5 page Class Notes was uploaded by Brianna Dwinnell on Thursday October 15, 2015. The Class Notes belongs to ECON 224 002 at University of South Carolina taught by Elizabeth Marie Breitbach in Summer 2015. Since its upload, it has received 73 views. For similar materials see Introduction to Economics in Economcs at University of South Carolina.
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Date Created: 10/15/15
Market Failures Brianna Dwinnell Market Failures in Competitive Markets 0 Sometimes markets fail to product the right amount of a product 0 Scarce resources may be 0 Underallocated o Overallocated Demand Side Market Failures Private demand curves understate consumers full willingness to pay for a good or service 0 Underallocation of resources 0 EX Public Parks Art Work etc 0 Many people can enjoy the bene ts without paying SupplySide Market Failures Private supply curves understate the full cost of producing a good or service 0 Overallocation of resources 0 EX manufacturing plant emitting pollution farm abusing the land or water 0 The rm is not paying for the full cost of producing the product not being able to breathe clean air because of pollution or swim in lakeleads to supplyside market failure Market Failures Not operating ef ciently Government intervention 0 We will talk about2 market failures 0 Public goods 0 Externalities Private and Public Goods 0 All goods can be divided into 4 categories based on 2 characteristics 0 Two characteristics o Rivalry in consumption 0 Excludability Rivalry When one person buys and consumes a product it is not available for other people to buy and consume Rival consumable 0 Ice cream cone if I take it and eat it no one else can 0 Any food or drink itemclothing item 0 Nonrival cannot consume it 0 Painting on a wall multiple people can look at it at once 0 Looking at reworks 0 Watching Net ix Excludability Sellers can keep people who do not pay for a product from obtaining the bene ts Excludability o If you don t purchase ticket you cannot see event 0 Cable 0 Anything sold in a store NonExcludable o Sidewalk 0 Public Parks 0 Outdoor concert Excludable NonExcludable Rival Private goods Common Goods Food and clothing Fish in open sea Car Atmosphere House Pubic waterways NonRival Lowcongestion Goods Public Goods Cable Television NATURAL DEFENSE Satellite Radio even if you never pay Online WSJ taxes we don t make youleave Google internet Public Goods Characteristics 0 Free Rider Problem 0 A customer who has an incentive to underestimate the value of a good in order to secure its bene ts at a lower price EX using Wikipedia but not donating to it Group projects cheating on taxes research and development 0 Public goods have inef cient market outcomes 0 Governments often enter the market to move it toward equilibrium CostBene t Analysis Bene t if we can measure willingness to pay for the product we know the bene t 0 People have an incentive to lie 0 Cost 0 The opportunity cost of the project 0 Resources are taken from the production of private goods and services Externalities Side effects borne by people who are not directly involved in market exchanges External Bene tspositive side effects of ordinary economic activities 0 When your neighbor xes their house makes the neighborhood look better 0 External Costs negative side effects of ordinary economic activities 0 Pollution Public Goods V Externalities Both lead to an inef cient allocation of resources Externalities are unintended side effects of activities Public goods are underallocation of goods shared by all Government Intervention Correct negative externalities 0 De ne property rights 0 Speci c taxes 0 Direct control Pollution o Peremissionunit tax 0 Tradable emission permits Correct positive externalities o Gov subsidies to consumers and producers 0 Tax refunds or deductions Taxes and Subsidies The government levies taxes and subsidies on many goods and services The government can make the buyer or seller pay the tax The tax can be a of the good s price or a speci c amount for each unit sold 0 We will analyze perunit taxes only Taxes drives a wedge between the demand and supply curve It doesn t matter who pays the tax write the check out to the gov both the buyer and the seller will split the bill 0 Except in extreme cases To determine where the wedge is placed move from the equilibrium to the left until the difference between the curves the tax Move from the equilibrium to the right for a subsidy Once the wedge is made we can see the new amount sellers receive and the new price buyers pay The Tax Incidence is the difference between the equilibrium price and the new prices The Incidence of Tax The incidence how the burden of the tax is shared among the market participants In pizza example buyer pays 1 more Seller gets 50 less 0 Both are less happy 0 EX sellers item tax 60 buyers total sellers get the total of the item price buyers pay the total price Elasticity and Tax Incidence CASE 1 Supply is more elastic than demand 0 buyers and sellers both have a tax burden Tax price is determined from equilibrium and whether you are a buyer or seller move up or down to nd tax burden o It is easier for sellers than buyers to leave the market So buyers bear most of the burden of the tax 0 CASE 2 Demand is more elastic than supply 0 Buyers have smaller portion of tax burden and sellers bear a greater burden of tax 0 It s easier for buyers than sellers to leave the market Sellers bear most of the burden of the tax
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