6.1 Socially Efficient and Inefficient Market Outcomes

• Socially efficiency is when resources are allocated effectively

• MSB=MSC !!

• Allocatively Efficient Points

  • Perfectly competitive market : S=D, MB=MC

  • Perfectly competitive firm : P=MC

  • Perfectly competitive labor market : W=MRP (total economic surplus : MSC=MSB)

• Causes of Market Failure

  • Market power (imperfectly competitive markets)

  • Asymmetric information (lack of info provided by buyers and sellers)

  • Positive and negative externalities

  • Insufficient production of public goods

• Government policies used to get rid of DWL

  • Taxes

  • Subsidies

  • Reguations

  • Public prodivions

• Market failure : exists when firms produce @ MPC=MPC, S=D

• The government tries to get them to produce @ MSC =MSB

6.2: Externalities

• Externality : when external cost/benefit is placed on members of society who did not pay for them

• MSB does not equal MSC

• Negative externality : when someone uses a product, it decreases the benefit of others (ex. smoking), MSC > MPC (correct with per unit tax)

• Positive externality : when one uses a product, others benefit  (ex. education) MSC < MPC (correct with subsidy)

6.3: Public and Private Goods

• Rivalrous good : if someone consumers a product, others cannot

  • Rivalrous : food, shoes, etc

  • Nonrivalrous : national defense, fireworks, etc

  • Somewhere in middle : schools, roads, etc

• Excludable good : non payers can be prevented from enjoying the benefits

  • Excludable : food, school, etc

  • Nonexcludable : national defense, air, etc

• Public goods : underproduced due to freeloader problem

• Examples : national defense, law enforcement, etc

• Freeloader problem : people can enjoy the benefit of a good/service without paying

• Government will provide subsidies to producers

• Private goods : goods produced by private markets, can be excludable

6.4: The Effects of Government Intervention in Different Market Structures

• Causes of inefficient markets

  • Market power

  • Externalities

  • Nonrival and nonexcludable goods (public goods)

• Forms of government intervention

  • Taxes

  • Subsidies

  • Price floors/ceilings

  • Regulation

• Per unit subsidy : gives benefits per unit

  • Perfect competition : MC, ATC, AVC decreases, price doesn’t change (price taker)

  • Monopolistic competition : MC, ATC, price decreases (price maker @ MR=MC)

• Lump sum subsidy : gives benefit no matter how many units

• Taxes will always shift supply curve to the left in long run, profits decrease

• Per unit tax : increase MC, ATC, and AVC

  • Perfect competition : MC, ATC, AVC increases, price doesn’t change (price taker)

  • Monopolistic competition : MC, ATC, price increases (price maker @ MR=MC)

• Lump sum tax : only increase ATC

• won’t change output level

• Non price regulation : works like taxes, they ensure competition/environmental protection/health and safety

• Antitrust policy : promote competition and prevents monopolies

• Antitrust laws

  • Lawsuits

  • Price controls

  • Subsidies

• Price ceiling : sets minimum price

  • Perfect competition : causes shortage

  • Monopolistic competition : becomes MR curve, price and output decreases

• Price floor : sets maximum price

  • Perfect competition : leads to surplus

  • Monopsony : wages go up and workers go up

6.5: Inequality

• Income distribution : measures % of income that goes to individuals in different percentiles/brackets

• In a system with perfectly equality : everyone would receive equal shares of income

• Income : wages, rent, interest, profit

• Lorenz curve : measures the distribution of income equality  (you want to be as close of possible to the perfect equality line as possible)

  

• Gini coefficient : A/(A+B)

  • Closer to 0, more equality

  • Closer to 1, the more inequality

• Causes of income inequality

  • Supply + demand in labor market

  • Human capital

  • Discrimination

  • Inheritance

  • Bargaining power

  • Etc

• Policies to address inequality

  • Taxes + transfers

  • Minimum wage laws

  • Anti-poverty program

  • Income protection program

  • Scholarships

• Taxes :

  • Proportional : everyone pays the same percentage of their income (no impact on income distribution)

  • Progressive : taxes are higher % on people earning a higher income (reduces income inequality)

  • Regressive : taxes are lower % on people earning a higher income (increases income inequality)