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07. market efficiency & the public interest
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Markets, Efficiency andMarkets, Efficiency andthe Public Interestthe Public Interest
Markets, Efficiency and the Public InterestMarkets, Efficiency and the Public Interest
Efficiency under Perfect Competition
Efficiency under Perfect Competition
EFFICIENCY UNDER PERFECT COMPETITIONEFFICIENCY UNDER PERFECT COMPETITION
• Defining social efficiency
– Pareto improvements
– Pareto optimality
• Private efficiency
– ‘rational’ economic behaviour
– equating marginal benefits and marginal costs
• Defining social efficiency
– Pareto improvements
– Pareto optimality
• Private efficiency
– ‘rational’ economic behaviour
– equating marginal benefits and marginal costs
• Achieving social efficiency under perfect competition– efficiency in consumption: MU = P
– efficiency in production: P = MC
• Achieving social efficiency under perfect competition– efficiency in consumption: MU = P
– efficiency in production: P = MC
EFFICIENCY UNDER PERFECT COMPETITIONEFFICIENCY UNDER PERFECT COMPETITION
Maximum total surplus under perfect competitionMaximum total surplus under perfect competition
O
£
Q
D = MU
Pe
Qe
MC
B
O
MC
£
Q
D = MU
Pe
Qe
C
A
Maximum total surplus under perfect competitionMaximum total surplus under perfect competition
• Achieving social efficiency under perfect competition– efficiency in consumption: MU = P
– efficiency in production: P = MC
– assumption of no externalities
• Achieving social efficiency under perfect competition– efficiency in consumption: MU = P
– efficiency in production: P = MC
– assumption of no externalities
EFFICIENCY UNDER PERFECT COMPETITIONEFFICIENCY UNDER PERFECT COMPETITION
• Achieving social efficiency under perfect competition– efficiency in consumption: MU = P
– efficiency in production: P = MC
– assumption of no externalities
– social efficiency in goods markets:MSB = MSC
• Achieving social efficiency under perfect competition– efficiency in consumption: MU = P
– efficiency in production: P = MC
– assumption of no externalities
– social efficiency in goods markets:MSB = MSC
EFFICIENCY UNDER PERFECT COMPETITIONEFFICIENCY UNDER PERFECT COMPETITION
B
O
MC
£
Q
D = MU
Pe
Qe
C
A
Maximum total surplus under perfect competitionMaximum total surplus under perfect competition
• Achieving social efficiency under perfect competition– efficiency in consumption: MU = P
– efficiency in production: P = MC
– assumption of no externalities
– social efficiency in goods markets:MSB = MSC
– social efficiency in factor markets:MSBf = MSCf
• Achieving social efficiency under perfect competition– efficiency in consumption: MU = P
– efficiency in production: P = MC
– assumption of no externalities
– social efficiency in goods markets:MSB = MSC
– social efficiency in factor markets:MSBf = MSCf
EFFICIENCY UNDER PERFECT COMPETITIONEFFICIENCY UNDER PERFECT COMPETITION
• Achieving social efficiency under perfect competition– efficiency in consumption: MU = P
– efficiency in production: P = MC
– assumption of no externalities
– social efficiency in goods markets:MSB = MSC
– social efficiency in factor markets:MSBf = MSCf
• Interdependence, efficiency and the invisible hand
• Achieving social efficiency under perfect competition– efficiency in consumption: MU = P
– efficiency in production: P = MC
– assumption of no externalities
– social efficiency in goods markets:MSB = MSC
– social efficiency in factor markets:MSBf = MSCf
• Interdependence, efficiency and the invisible hand
EFFICIENCY UNDER PERFECT COMPETITIONEFFICIENCY UNDER PERFECT COMPETITION
FIRMSFIRMS(suppliers of goods and services,(suppliers of goods and services,
demanders of factor services)demanders of factor services)
HOUSEHOLDSHOUSEHOLDS(demanders of goods and services,(demanders of goods and services,
suppliers of factor services)suppliers of factor services)
The interdependence of goods and factor marketsThe interdependence of goods and factor markets
££
££ (1) Consumer(1) Consumer demanddemand
D1 = MU1
= MSBG1
P
QO
The interdependence of goods and factor marketsThe interdependence of goods and factor markets
££
££
Goods
Goods
D1 = MU1
= MSBG1
(1) Consumer(1) Consumer demanddemand
(2) Producer(2) Producer supplysupply
P
Q
S = MC = MSCG
O
The interdependence of goods and factor marketsThe interdependence of goods and factor markets
££
££
Goods
Goods
(1) Consumer(1) Consumer demanddemand
(2) Producer(2) Producer supplysupply
P
Q
S
D1
P1
Q1O
The interdependence of goods and factor marketsThe interdependence of goods and factor markets
££ ££
££££
Goods
Goods
D1 = MRPF1 = MSBF1
(1) Consumer(1) Consumer demanddemand
(3) Factor(3) Factor demanddemand
(2) Producer(2) Producer supplysupply
P
QO
P
Q
S
D1
P1
Q1O
The interdependence of goods and factor marketsThe interdependence of goods and factor markets
P
Q
££ ££
££££
Factorservices
Goods
GoodsFactor
services
S = MDUF
= MSCF
D1 = MRPF1 = MSBF1
(1) Consumer(1) Consumer demanddemand
(4) Factor(4) Factor supplysupply
(3) Factor(3) Factor demanddemand
(2) Producer(2) Producer supplysupply
O
P
Q
S
D1
P1
Q1O
The interdependence of goods and factor marketsThe interdependence of goods and factor markets
P
Q
££ ££
££££
Factorservices
Goods
Goods
(1) Consumer(1) Consumer demanddemand
(4) Factor(4) Factor supplysupply
(3) Factor(3) Factor demanddemand
(2) Producer(2) Producer supplysupply
PF1
QF1O
P
Q
S
D1
P1
Q1O
Factorservices
S
D1
The interdependence of goods and factor marketsThe interdependence of goods and factor markets
P
Q
££ ££
££££
Factorservices
Goods
Goods
S
D1
(1) Consumer(1) Consumer demanddemand
(4) Factor(4) Factor supplysupply
(3) Factor(3) Factor demanddemand
(2) Producer(2) Producer supplysupply
O
PF1
QF1
P
Q
S
D1
P1
Q1O
D2 = MU2
= MSBG2
P2
Q2
Factorservices
The interdependence of goods and factor marketsThe interdependence of goods and factor markets
P
Q
P
Q
££ ££
££££
Factorservices
Goods
Goods
S S
D1 D1
(1) Consumer(1) Consumer demanddemand
(4) Factor(4) Factor supplysupply
(3) Factor(3) Factor demanddemand
(2) Producer(2) Producer supplysupply
P1
Q1OO
D2 = MU2
= MSBG2
P2
Q2
D2 = MRPF2
= MSBF2
PF1
QF1
PF2
QF2
Factorservices
The interdependence of goods and factor marketsThe interdependence of goods and factor markets
Markets, Efficiency and the Public InterestMarkets, Efficiency and the Public Interest
Social Efficiency: Intermediate Analysis
Social Efficiency: Intermediate Analysis
SOCIAL EFFICIENCY: INTERMEDIATE ANALYSISSOCIAL EFFICIENCY: INTERMEDIATE ANALYSIS
• Private efficiency in goods markets– in consumption:
MUX / MUY (MRS) = PX / PY
– in production:MCX / MCY (MRT) = PX / PY
• Social efficiency in goods markets– between consumers:
MRSa = MRSb ... = MRSn
– between producers:MRTg = MRTh ... = MRTn
– in exchange (assuming no externalities):social MRS = social MRT
• Private efficiency in goods markets– in consumption:
MUX / MUY (MRS) = PX / PY
– in production:MCX / MCY (MRT) = PX / PY
• Social efficiency in goods markets– between consumers:
MRSa = MRSb ... = MRSn
– between producers:MRTg = MRTh ... = MRTn
– in exchange (assuming no externalities):social MRS = social MRT
• Social efficiency in factor markets
• The achievement of general equilibrium
• Social efficiency in factor markets
• The achievement of general equilibrium
SOCIAL EFFICIENCY: INTERMEDIATE ANALYSISSOCIAL EFFICIENCY: INTERMEDIATE ANALYSIS
O
Go
od
Y
Good X
Productionpossibility curve
Slope = MRT
Social efficiency under perfect competitionSocial efficiency under perfect competition
O
I3
I2
I1
Go
od
Y
Good X
Slope = MRS
Social indifference curves
Slope = MRT
Social efficiency under perfect competitionSocial efficiency under perfect competition
O
I3
I2
I1
Go
od
Y
Good X
Market priceratio
Slope = MRS
Slope = PX / PY
Slope = MRT
s
MRS = PX / PY = MRT
Social efficiency under perfect competitionSocial efficiency under perfect competition
Markets, Efficiency and the Public InterestMarkets, Efficiency and the Public Interest
The Case for Government Intervention
The Case for Government Intervention
CASE FOR GOVERNMENT INTERVENTIONCASE FOR GOVERNMENT INTERVENTION
• Externalities
– External costs of production MSC > MC
• Externalities
– External costs of production MSC > MC
Q1
External costs in productionExternal costs in production
O
MC = S
DP
Co
sts
and
be
nef
its
Quantity
O
MC = S
DP
MSC
Co
sts
and
be
nef
its
Quantity
External cost
Q1Q2
Social optimum
External costs in productionExternal costs in production
CASE FOR GOVERNMENT INTERVENTIONCASE FOR GOVERNMENT INTERVENTION
• Externalities
– External costs of production MSC > MC
– External benefits of production MSC < MC
• Externalities
– External costs of production MSC > MC
– External benefits of production MSC < MC
External benefits in productionExternal benefits in production
O
DP
MC = S
Q1
Co
sts
and
be
nef
its
Quantity
O
MSC
DP
Q1
External benefit
Co
sts
and
be
nef
its
Quantity
MC = S
Q2Social optimum
External benefits in productionExternal benefits in production
O
MC = S
DP
Q1Q2
Cos
ts a
nd b
enef
its (
£)
Quantity
MSC
External cost
(a ) External costs
O
DP
Q2Q1
Cos
ts a
nd b
enef
its (
£)
Quantity
MSCMC = S
External benefit
(b) External benefits
External costs and benefits in productionExternal costs and benefits in production
CASE FOR GOVERNMENT INTERVENTIONCASE FOR GOVERNMENT INTERVENTION
• Externalities
– External costs of production MSC > MC
– External benefits of production MSC < MC
– External costs of consumption MSB < MB
• Externalities
– External costs of production MSC > MC
– External benefits of production MSC < MC
– External costs of consumption MSB < MB
Q1
(MB)MU = D
External costs in consumptionExternal costs in consumption
O
DP
Co
sts
and
be
nef
its
Quantity
Q2
(MB)MU = D
O
DP
Co
sts
and
be
nef
its
Quantity
External cost
MSB
Q1
External costs in consumptionExternal costs in consumption
Social optimum
CASE FOR GOVERNMENT INTERVENTIONCASE FOR GOVERNMENT INTERVENTION
• Externalities
– External costs of production MSC > MC
– External benefits of production MSC < MC
– External costs of consumption MSB < MB
– External benefits of consumption MSB > MB
• Externalities
– External costs of production MSC > MC
– External benefits of production MSC < MC
– External costs of consumption MSB < MB
– External benefits of consumption MSB > MB
(MB)MU = D
O
DP
Q1
Co
sts
and
be
nef
its
Quantity
External benefits in consumptionExternal benefits in consumption
Q2
(MB)MU = D
O
DP
Q1
Co
sts
and
be
nef
its
Quantity
External benefit
MSB
Social optimum
External benefits in consumptionExternal benefits in consumption
O
MB
PP
Cos
ts a
nd b
enef
its (
£)
Car miles
MSB
External cost
O
MB
PP
Q1
Cos
ts a
nd b
enef
its (
£)
Rail miles
Q2
MSB
External benefit
(a ) External costs (b) External benefits
External costs and benefits in consumptionExternal costs and benefits in consumption
Q1Q2
• Public goods– Non-rivalry
– Non-excludability: free-rider problem
• Common resources– equilibrium use of a common resource
• Public goods– Non-rivalry
– Non-excludability: free-rider problem
• Common resources– equilibrium use of a common resource
CASE FOR GOVERNMENT INTERVENTIONCASE FOR GOVERNMENT INTERVENTION
£
Number of boats O
MRP
ARP
Fishing in open-access fishing groundsFishing in open-access fishing grounds
AC = MC
£
Number of boats O B1
MRP
ARP
Fishing in open-access fishing groundsFishing in open-access fishing grounds
AC = MC
B3B2
The collective optimumfor boat ownersBeyond this point nomore fish can be caught
Equilibrium: well beyondthe optimum
• Public goods– Non-rivalry
– Non-excludability: free-rider problem
• Common resources– equilibrium use of a common resource
– the tragedy of the commons
• Public goods– Non-rivalry
– Non-excludability: free-rider problem
• Common resources– equilibrium use of a common resource
– the tragedy of the commons
CASE FOR GOVERNMENT INTERVENTIONCASE FOR GOVERNMENT INTERVENTION
• Public goods– Non-rivalry
– Non-excludability: free-rider problem
• Common resources– equilibrium use of a common resource
– the tragedy of the commons
– current-day examples
• Public goods– Non-rivalry
– Non-excludability: free-rider problem
• Common resources– equilibrium use of a common resource
– the tragedy of the commons
– current-day examples
CASE FOR GOVERNMENT INTERVENTIONCASE FOR GOVERNMENT INTERVENTION
• Public goods– Non-rivalry
– Non-excludability: free-rider problem
• Common resources– equilibrium use of a common resource
– the tragedy of the commons
– current-day examples
• Market power
• Public goods– Non-rivalry
– Non-excludability: free-rider problem
• Common resources– equilibrium use of a common resource
– the tragedy of the commons
– current-day examples
• Market power
CASE FOR GOVERNMENT INTERVENTIONCASE FOR GOVERNMENT INTERVENTION
• Public goods– Non-rivalry
– Non-excludability: free-rider problem
• Common resources– equilibrium use of a common resource
– the tragedy of the commons
– current-day examples
• Market power– lack of Pareto optimality
• Public goods– Non-rivalry
– Non-excludability: free-rider problem
• Common resources– equilibrium use of a common resource
– the tragedy of the commons
– current-day examples
• Market power– lack of Pareto optimality
CASE FOR GOVERNMENT INTERVENTIONCASE FOR GOVERNMENT INTERVENTION
MC1
Q1
MC
MRAR
A monopolist producing less than the social optimumA monopolist producing less than the social optimum
O
P1
£
Monopoly output
Q
O
P1
MC1
MC = MSC
Q1
MRAR = MSB
Q2
P2 = MSB
= MSC
£
QMonopoly output Perfectly competitive output
A monopolist producing less than the social optimumA monopolist producing less than the social optimum
• Public goods– Non-rivalry
– Non-excludability: free-rider problem
• Common resources– equilibrium use of a common resource
– the tragedy of the commons
– current-day examples
• Market power– lack of Pareto optimality
– deadweight loss under monopoly
• Public goods– Non-rivalry
– Non-excludability: free-rider problem
• Common resources– equilibrium use of a common resource
– the tragedy of the commons
– current-day examples
• Market power– lack of Pareto optimality
– deadweight loss under monopoly
CASE FOR GOVERNMENT INTERVENTIONCASE FOR GOVERNMENT INTERVENTION
O
£
Q
Ppc
Qpc
AR = D
Consumersurplus
Producersurplus
Deadweight loss under monopolyDeadweight loss under monopolyMC
(= S under perfect competition)
(a) Industry equilibrium under perfect competition(a) Industry equilibrium under perfect competition
a
MRO
£
Q
Ppc
Qpc
AR = D
a
Qpc
Pm
bConsumer
surplus
Producersurplus
Deadweightwelfare loss
MC(= S under perfect competition)
(b) Industry equilibrium under monopoly(b) Industry equilibrium under monopoly
Deadweight loss under monopolyDeadweight loss under monopoly
O
£
Q
Ppc
Qpc
AR = D
Consumersurplus
Producersurplus
MC(= S under perfect competition)
(a) Industry equilibrium under perfect competition(a) Industry equilibrium under perfect competition
a
Perfectcompetition
Deadweight loss under monopolyDeadweight loss under monopoly
MRO
£
Q
Ppc
Qpc
AR = D
a
Qpc
Pm
bConsumer
surplus
Producersurplus
Deadweightwelfare loss
MC(= S under perfect competition)
(b) Industry equilibrium under monopoly(b) Industry equilibrium under monopoly
Monopoly
Deadweight loss under monopolyDeadweight loss under monopoly
• Ignorance and uncertainty
• Immobility of factors and time lags
• Protecting people’s interests
– dependants
– merit goods
• Other objectives
• Possible conflict between objectives
• Limitations of economics in assisting policy making
• Ignorance and uncertainty
• Immobility of factors and time lags
• Protecting people’s interests
– dependants
– merit goods
• Other objectives
• Possible conflict between objectives
• Limitations of economics in assisting policy making
CASE FOR GOVERNMENT INTERVENTIONCASE FOR GOVERNMENT INTERVENTION
Markets, Efficiency and the Public InterestMarkets, Efficiency and the Public Interest
Forms of Government Intervention
Forms of Government Intervention
FORMS OF GOVERNMENT INTERVENTIONFORMS OF GOVERNMENT INTERVENTION
• The problem of the second best– the first-best world– the second-best solution to market
distortions
• Taxes and subsidies– to correct externalities
• the first-best world
• The problem of the second best– the first-best world– the second-best solution to market
distortions
• Taxes and subsidies– to correct externalities
• the first-best world
Q1O
MC = S
DP
Co
sts
and
be
nef
its
Quantity
Using taxes to correct a market distortion (“first-best” world)Using taxes to correct a market distortion (“first-best” world)
O
MC = S
DP
MSC
Co
sts
and
be
nef
its
Quantity
External cost
Q1Q2
Social optimum
Using taxes to correct a market distortion (“first-best” world)Using taxes to correct a market distortion (“first-best” world)
Q2
MC
Q1O
P
Co
sts
and
be
nef
its
Quantity
Optimum tax = MSC – MC
MC = SMSC
D
Using taxes to correct a market distortion (“first-best” world)Using taxes to correct a market distortion (“first-best” world)
O
DP
MC = S
Q1
Co
sts
and
be
nef
its
Quantity
Using subsidies to correct a market distortion (“first-best” world)Using subsidies to correct a market distortion (“first-best” world)
O
MSC
DP
Q1
External benefit
Co
sts
and
be
nef
its
Quantity
MC = S
Q2Social optimum
Using subsidies to correct a market distortion (“first-best” world)Using subsidies to correct a market distortion (“first-best” world)
MC
O
P
Q2Q1
Co
sts
and
be
nef
its
Quantity
Optimum subsidy
= MC – MSC
MSCMC = S
D
Using subsidies to correct a market distortion (“first-best” world)Using subsidies to correct a market distortion (“first-best” world)
FORMS OF GOVERNMENT INTERVENTIONFORMS OF GOVERNMENT INTERVENTION
• The problem of the second best– the first-best world– the second-best solution to market
distortions
• Taxes and subsidies– to correct externalities
• the first-best world• second-best tax and subsidy policies
• The problem of the second best– the first-best world– the second-best solution to market
distortions
• Taxes and subsidies– to correct externalities
• the first-best world• second-best tax and subsidy policies
Using taxes to correct for externalities:firms with monopoly power
Using taxes to correct for externalities:firms with monopoly power
O
P1
MC
Q1
MRD = MSB
£
Q
Monopoly priceand output
O
P1
MC
Q1
MRD = MSB
£
Q
MSC
P2
Q2
Optimum priceand output
Using taxes to correct for externalities:firms with monopoly power
Using taxes to correct for externalities:firms with monopoly power
O
P1
MC
Q1
MRD = MSB
£
Q
MSC
P2
Q2
Optimum taxon the monopoly
MC + tax
Optimumtax
Using taxes to correct for externalities:firms with monopoly power
Using taxes to correct for externalities:firms with monopoly power
O
P1
MC
Q1
MRD = MSB
£
Q
MSC
P2
Q2
Continuing excess profitscan be reduced by a further lump-sum tax
MC + tax
Optimumtax
Using taxes to correct for externalities:firms with monopoly power
Using taxes to correct for externalities:firms with monopoly power
FORMS OF GOVERNMENT INTERVENTIONFORMS OF GOVERNMENT INTERVENTION
• The problem of the second best– the first-best world– the second-best solution to market
distortions
• Taxes and subsidies– to correct externalities
• the first-best world• second-best tax and subsidy policies
– to correct for monopoly
• The problem of the second best– the first-best world– the second-best solution to market
distortions
• Taxes and subsidies– to correct externalities
• the first-best world• second-best tax and subsidy policies
– to correct for monopoly
FORMS OF GOVERNMENT INTERVENTIONFORMS OF GOVERNMENT INTERVENTION
• The problem of the second best– the first-best world– the second-best solution to market
distortions
• Taxes and subsidies– to correct externalities
• the first-best world• second-best tax and subsidy policies
– to correct for monopoly• use of lump-sum taxes plus subsidies
• The problem of the second best– the first-best world– the second-best solution to market
distortions
• Taxes and subsidies– to correct externalities
• the first-best world• second-best tax and subsidy policies
– to correct for monopoly• use of lump-sum taxes plus subsidies
O
P =AR
MC
Q1
MR AR = MSB
£
Q
Using a lump-sum tax to reduce monopoly profitsUsing a lump-sum tax to reduce monopoly profits
ProfitProfit(no tax)(no tax)
O
MC
Q1
MR AR = MSB
£
Q
AC
AC
P =AR
Using a lump-sum tax to reduce monopoly profitsUsing a lump-sum tax to reduce monopoly profits
11
22
O
P1
MC
Q1
MR AR = MSB
£
Q
ACAC + lump-sum tax
AC
AC + tax
1. Acceptable profit2. Lump sum tax
necessary to achieve acceptable profit
Using a lump-sum tax to reduce monopoly profitsUsing a lump-sum tax to reduce monopoly profits
FORMS OF GOVERNMENT INTERVENTIONFORMS OF GOVERNMENT INTERVENTION
• The problem of the second best– the first-best world– the second-best solution to market
distortions
• Taxes and subsidies– to correct externalities
• the first-best world• second-best tax and subsidy policies
– to correct for monopoly• use of lump-sum taxes plus subsidies
– advantages and disadvantages of taxes and subsidies
• The problem of the second best– the first-best world– the second-best solution to market
distortions
• Taxes and subsidies– to correct externalities
• the first-best world• second-best tax and subsidy policies
– to correct for monopoly• use of lump-sum taxes plus subsidies
– advantages and disadvantages of taxes and subsidies
Deadweight loss from an indirect taxDeadweight loss from an indirect tax
O
S
£
Q
D
P1
Q1
Before-taxsituation
O
S
£
Q
D
P1
Q1
Before-taxsituation
Consumersurplus
Consumersurplus
Deadweight loss from an indirect taxDeadweight loss from an indirect tax
O
S
£
Q
D
P1
Q1
Consumersurplus
Consumersurplus
ProducersurplusProducersurplus
Before-taxsituation
Deadweight loss from an indirect taxDeadweight loss from an indirect tax
O
S
£
Q
D
P1
Q1
S + tax
Q2
P2
P2 tax
Deadweight loss from an indirect taxDeadweight loss from an indirect tax
O
S
£
Q
D
P1
Q1
S + tax
Q2
P2
11
22 3344
66
55P2 tax
Deadweight loss from an indirect taxDeadweight loss from an indirect tax
O
S
£
Q
D
P1
Q1
S + tax
Q2
P2
11
22 3344
66
55P2 tax
Deadweight loss from an indirect taxDeadweight loss from an indirect tax
O
S
£
Q
D
P1
Q1
S + tax
Q2
P2
11
22 3344
66
55P2 tax
Deadweight loss from an indirect taxDeadweight loss from an indirect tax
O
S
£
Q
D
P1
Q1
S + tax
Q2
P2
11
22 3344
66
55P2 tax
Tax revenuefor government
Deadweight loss from an indirect taxDeadweight loss from an indirect tax
O
S
£
Q
D
P1
Q1
S + tax
Q2
P2
11
22 3344
66
55P2 tax
Deadweightloss from tax
Deadweight loss from an indirect taxDeadweight loss from an indirect tax
• Changes in property rights– the problem of limited property rights
– extending property rights
– the Coase theorem
– limitations of this solution
• Legal controls– laws prohibiting behaviour that imposes
external costs
– laws to regulate monopoly power
– laws to prevent firms from exploiting people’s ignorance
• Changes in property rights– the problem of limited property rights
– extending property rights
– the Coase theorem
– limitations of this solution
• Legal controls– laws prohibiting behaviour that imposes
external costs
– laws to regulate monopoly power
– laws to prevent firms from exploiting people’s ignorance
FORMS OF GOVERNMENT INTERVENTIONFORMS OF GOVERNMENT INTERVENTION
• Regulatory bodies
• Price controls
– high minimum prices
– low maximum prices
• Provision of information
• The direct provision of goods and services
– providing public goods
– other goods
– making rational decisions
• Public ownership
• Regulatory bodies
• Price controls
– high minimum prices
– low maximum prices
• Provision of information
• The direct provision of goods and services
– providing public goods
– other goods
– making rational decisions
• Public ownership
FORMS OF GOVERNMENT INTERVENTIONFORMS OF GOVERNMENT INTERVENTION
Markets, Efficiency and the Public InterestMarkets, Efficiency and the Public Interest
Cost–Benefit AnalysisCost–Benefit Analysis
COST–BENEFIT ANALYSISCOST–BENEFIT ANALYSIS
• The procedure
• Identifying costs and benefits
– costs
• direct private monetary
• external monetary
• external non-monetary
– benefits
• direct private monetary
• private non-monetary
• The procedure
• Identifying costs and benefits
– costs
• direct private monetary
• external monetary
• external non-monetary
– benefits
• direct private monetary
• private non-monetary
O
D
50p
Q1
£
Q
Private non-monetary benefits (consumer surplus)Private non-monetary benefits (consumer surplus)
O
D
50p
Q1
£
Q
Consumersurplus
Consumersurplus
Private non-monetarybenefit
Private non-monetary benefits (consumer surplus)Private non-monetary benefits (consumer surplus)
COST–BENEFIT ANALYSISCOST–BENEFIT ANALYSIS
• The procedure
• Identifying costs and benefits
– costs
• direct private monetary
• external monetary
• external non-monetary
– benefits
• direct private monetary
• private non-monetary
• external
• The procedure
• Identifying costs and benefits
– costs
• direct private monetary
• external monetary
• external non-monetary
– benefits
• direct private monetary
• private non-monetary
• external
• Measuring costs and benefits
– direct private monetary costs and benefits
– non-monetary private benefits
– monetary externalities
– non-monetary externalities
• Risk and uncertainty
– sensitivity analysis
• Measuring costs and benefits
– direct private monetary costs and benefits
– non-monetary private benefits
– monetary externalities
– non-monetary externalities
• Risk and uncertainty
– sensitivity analysis
COST–BENEFIT ANALYSISCOST–BENEFIT ANALYSIS
• Discounting
– working out the NPV
– choosing the discount rate
• The distribution of costs and benefits
– the strict Pareto criterion
– the Hicks–Kaldor criterion
– taking specific account of redistributive consequences
• Discounting
– working out the NPV
– choosing the discount rate
• The distribution of costs and benefits
– the strict Pareto criterion
– the Hicks–Kaldor criterion
– taking specific account of redistributive consequences
COST–BENEFIT ANALYSISCOST–BENEFIT ANALYSIS
Markets, Efficiency and the Public InterestMarkets, Efficiency and the Public Interest
The Case for Laissez-FaireThe Case for Laissez-Faire
THE CASE FOR LAISSEZ-FAIRETHE CASE FOR LAISSEZ-FAIRE
• The growth of libertarian thinking– the neo-Austrian school and its influence on
radical-right thinking– libertarian policies of governments
• Drawbacks of government intervention– shortages and surpluses– poor information– bureaucracy and inefficiency– lack of market incentives– shifts in government policy– lack of freedom for the individual
• The growth of libertarian thinking– the neo-Austrian school and its influence on
radical-right thinking– libertarian policies of governments
• Drawbacks of government intervention– shortages and surpluses– poor information– bureaucracy and inefficiency– lack of market incentives– shifts in government policy– lack of freedom for the individual
• Advantages of the free market
– automatic adjustments
– dynamic advantages of capitalism
– high degree of competition even under monopoly/oligopoly
• Judging the arguments
• Advantages of the free market
– automatic adjustments
– dynamic advantages of capitalism
– high degree of competition even under monopoly/oligopoly
• Judging the arguments
THE CASE FOR LAISSEZ-FAIRETHE CASE FOR LAISSEZ-FAIRE