Market failure Ch 17

.
 Most ammou reasons orgoverumentIntervention are the needb

cornect market faluret solve thepoblem rfrnome ineqnality

Marlet failure
,
marketfailureTsa 5 Ttnation in which the maretfails r allocat
resourres effioiently ( MSctMSB )

Themarlcet wil be efficient when marginaleqnal

st
sbmarginal
的 st
Xover -

lunder - porctio XDWL

Sitnation themaretfails to achieve efficieucy

presene of ③ ) restrrced
D 阳 Vision of externalities
public goods
∞ mpcNition

Gxternalities
-
negative

的 siive

Negative ldetrinmentall
("
harmfnl Gxternalitus

exishwhen party ' action harms1 imposes rther

s

sst on
a

parties but it doesmt pay ompensationbthem

privatt bst ' the ast borne by the parlywhstae the action .

external The ost borrebythe partiey other than the derisTon maber
-

:
的 {t of the autTons , but the parties affected will be
wot
ompensated
Apoductron
oer
social st the ost bormeby the society
-

:
的
ext 比 rnalTlTes exTsl 7

negative
_

st
divergene betullerprrvate t 8 ocial

socTal ast =
externd l t
prrat 的
的 s 比
 Graph :

Prra( $ ) MSc

MPC
st
i
MSV
比terual
的

哪
: 17 wl
1 “
MSB
那
1
1

1
1
1
MSB =
MPB
!
, α 1

21 marlet eqwilibrinm
xuanity
孔
lffiiTent
outputleve 1
balexplanation
ver :

The ( fautoy owher ) will onsider his pnrale sst

tprvate benefit only
∴ They w1 ll poduce unt MPBMpl
= .
Supprsel the harm ) ,
soml laffectedparti )
willbeattected sufferl
/ -

if ( derision- maker ) dselmt ompensate

lalfected parties ) ,
the ldecisTon -

maker ) will overupsdncd atQl , wlhich

laryer than the efficient autputleved .MSC > rSB

is

Pwl is resulid. Ther isineffioilug allocation

iu rdourey
.
 PosTtivel Benkcial externalities

beneftits other parhes

. bnt the
xist whena
parly " action ' parly does
receive foe them
payment
.

privaebenefit
the benefit ac tin takes the whs
:

sthe party

exterwal benefit : the benefitsgenerated the

b

parties otherthan thedecisTon - mallr ,

butthe onewhs takes the action bes wot relire any

payment fom othen .

boviol benefit: thebenetktglnerated s the society ounder _

podnction
4 private t externalblnefits

P <$ )
MSCMPC

i ⑧
那

1
pWl

1
MSB
1
MPB

! ! ⼜
Q
1 *

The decisTon makerwll only considerhisprivatesst and prvatebenetit .

S 0

,
hewill

Supposethis will lbenefit

.If thedecisiou maker
poduce at MPCEM PB . )

iguote

the external benefit and does wot reuive any payments om ( other parte 1 ) Th .

decisTon macr will wuder . poduce atI 1 , hrichis smaler than the efficiout output
level , MSB zusc . pwL wibe resnited →
ineffilieny .
 MSC -

MSB 7
-

br the over -

prdueld uits =
DWL

Solntions b the prblems of ex 比 rnalitie 1

xternalitics )
1 Taxation harml

p (
$) + Tax )
MPCI ( MPC 1

MSU

?
:
MPC 1 ⼝ wl
那

tax

: MSB =
MPB
⼜

戏⼜ 1

externalities if Thhunittax
A unit tax coam solve theimblem of

negakve
s thedifference between and
MsomsB IMtc ) at the
Tmposld equals
increased
efficient out putlevd . Marginad privateoslTy
prduer wllc hooe the redud pnduction
by the amount of tax and the

为 *Mere MPC 2
m 比 rects ; MSB

tffToilny will
he achieved
prduetTon / Dwl
longer my
over -

m
 ⽉ Subiidizatiou

p( $ ) = MPC
MSC 1

MPC 2
=
MPE
-

subsidy

pwl

! ,

: 问
!
MPB
MSB

⼜
*
X 1 Q

A wnit subsidy cm be used b solvethe pbblemrprsTrieexternalitiesif

the amount porided qals s thedifferencebetween Ms 13 and Msc ( MEC )
at the efficient output level . The prvatebeufit willbe
mayinal
increased by the nmount of the subiidy and prduer willchooseb
*
a

pradue msre at whee MPC 2 Interesects M 13

Xunder pmductTM /-

Dwl
→

ffficTenay
V

(3 RestrctTon / removal

a fTrm hermfulexlanality
.
The
governnent restricts s

的 n certainoutputleve 1
( Pubkcowership
ash
7

com tale over thefirm generatinglxternalitils ,

so

prduce at MSB
= MsC , rather than MPC =
MPB
leg . secanday schsol ,
Tncineraor

market solutTon
By

Ronald base

→
To solve the prblom ofxterndlitie) , government inerventIommaymt beneeded
marcet
fined prirate popertyrights
for scare
gonce overument
deha
D resourds
,

exchunge willemerge s sove the poblem

① (B)
Decisiommak
) (⽉ e PartTej affected

if the damage ) nssiguenb A . hast pay to askiyor

is vight t B
A

cutting onduction A B fTnds tle damagl b

its oulput ( MEC ) grenter
ii
.

than margimal prirate gain of A

prducing the last unit , Bw
1
lpaybA
to ask br cutting that unit .

take imb account the minhy reairedfosn anddat the

Awill B

pmduotIon .

Nill pbduceat whep

MEB = Msc
The A
Dwl fhom over
-

prohntionb
→ vefficient
 assighed 的
ompensaep hrll
Ifthe right tr damase is
B
, A

asking for theriguts prduce . ifA find , it ,maryimal

prrrategain fom prduringone more unit Ts greaterthanthelrss

b B it will ompensat B baskfor prduclythatnnit
,

will tae inb the account paidb B when

thmpensaion
determiniyowtpntlevel
- →MPCP → ontputh

→ X over -

poducll . n podueat MSB = MSC

XDwL VeffTcint

bnodusion : Konald sasl that extanalitily m1 lwot

sggeuted
existand the marbet exchangl wi 1 l result in efficilnm
if mell dlfined Transaction
popertyrights
are -

sts
negligible
的 oare

governmentrle
:
b define t prtcit
privale popery
:
rights
internalirationl self
③
-

restraint

The firms inrolved in harmfulextornalities wil find their own

way
p remove externalities

④ integration
The decisTon v maytake
maker er ( B
) bnsinesses b Tnternalie
The
negat ' ve externality . Thenerly onnbred firm willonsidlv
all exeernal ssttbenetit s maximire tstal gain
efticient
_
 0 If th ast ofuting any marlet 1 governmuts , hution
thante Dwl itselt
is
greater →btermt b s
anything
presene of
externalitiel 4 government shonldintervene
maret
excharylwi 1 ltaleplauti
Solve

private & public goods

prvate gords are gords that are rival t
excindable InansumptTon

:
kival iuansumptTon
.

cGnsumption ofthe good avrilabei

will redue the
quantity
allothers byanIhdividual

Excludable :

bnsumingtylnde
Thesuppliercan tiom
preven mnpogers
goidsat an afardabl ast

uslS

的 riontal summation ( market domandcurvl )

 pubkcgobds → hon
-
lxcludablethon -

rivalinbusumption

Nonrival rnot
.

The ousumption ofthe good by an individnnl wll redudthequantity

nunilable or yfhers

.Onceitis pried , itcanbencurrently ( = the same

timeinsumedn at

by allindindnals

additional unrt Tsen oneitis

-

Tlu marginal ast rfsirriny an

Prduced
iNonexcdndabe
⼆
astlyh
difficunlt bexcludenompaen
monsnmigd
.

It i , / " 的

snmmatlon l marlet
demand
vertical curve )
e
wationoan defene 1 1 ighthousl
g
-

PorisTon of public gords may leadh maret failue

→
Free -

rider poblem
:

tbo 的
stly liffiuilt
s excuudenon - payersom bnsnminggoods
→
povidersof public gords maybennablebsupplythemwithapofit

wulliy
be
"

eunder padnad
pmid nublic goods
not wilma
:

b
_

⼩
still prsilive 出wv
'

:
averayeoost
of
moduriny Ts

⼀ Tneficient
 Way s 的 tackle

tbksionby
thegovernme
yG smmfeearg
alump -