Unit 6 micro

• Market Failure : when private markets do not bring the allocation of resources that best satisfies society’s wants
• 3 examples of market failure :

  1. Use of Public Goods
  2. Externalities
  3. Information Asymmetries
• Public Goods go through Non-rivalry and non-excludability
• Non-rivalry : Shared consumption , people can have the goods or service simultaneously and benefit from it
• Non- excludability : no effective ways to exclude people from having the goods or service
• Free- Rider Problem : when people get access to a goods or service without paying for it
• Some grey areas :

  • Toll/ Club Goods : highly excludable, also shared consumption
  • Common Pool Resources : no exclusion, no shared consumption
• tragedy of the Commons : without defined property rights / ownerships, resources get over consumed, can possibly disappear
• Socially Efficient and Inefficient Outcomes :

  • Law of Diminishing Marginal Utility
  • Marginal Utility = Marginal Benefit
  • Marginal Cost maximizes total economic surplus (MB =MC)
• Social Efficiency(MSB = MSC) :

  • Marginal Social Benefit (MSB)
  • Marginal Social cost (MSC)
• Causes of DWL -> Market Failure/ inefficiency ( when markets transactions occur , sometimes there are external benefits and costs placed on others and we either have too much or too little of an outcome.
• External Cost : a costs that is imposed on others who are not a part of the transaction
• External Benefit : A benefit that is imposed on others who are not a part of the transaction
• Big problem -> Market overproduces and overconsumes causing negative externalities.
• The government can do to help negative externalities:

  • regulate pollution
  • tax the polluter
  • assign property rights
• the government can do for positive externalities :

  • Subsidize
  • Regulate (make it a law to receive it)
• Externalities occur due to :

  • Self - optimization
  • Lack of property rights
  • overconsumption / underconsumption
  • transaction costs (costs for transaction, if high, they get passed onto others)
  • Public Goods underfunded ( free rider problem causes incentives for firms to not produce the good, left to the government )
• Per-Unit tax : a charge for each quantity produced ( changes VC , then changes AVC, ATC, MC)
• Lump- Sum tax : 1 time change on good, no matter how much quantity is produced ( changes FC, then only ATC is gonna change )
• Gov't policies in monopolies :

  • Natural monopoly : unique situation
  • awesome at economics of scale ( lower costs)
  • firm is always producing when ATC is falling
• Regulated monopoly : Gov. uses a price ceiling

  • Socially optimal PC (P = MC), problem : ( P < ATC ) monopoly earns loss but gov. can give subsidizes
  • Fair Return Price ( P = ATC ) normal profit
• income determined :

  • Demand for the product (derived demand)
  • Worker Productivity
  • Supply of labor
• Lorenz curve illustrates inequality
• Lorenz Curve :

  • the larger area “A” is , the more unequal your society is
  • the smaller area “A” is, the more equal it is
• equation for Gini Ratio = area between lorenz curve + diagonal line / total area below the diagonal line OR A / A + B
• complete equality = 0 and complete inequality = 1
• as area of “A” increases -> Gini ratio rises