3 KEGAGALAN PASAR DAN INTERVENSI PEMERINTAH 3 1

3. KEGAGALAN PASAR DAN INTERVENSI PEMERINTAH

3. 1. Masalah kegagalan pasar q. In reality, no market such a perfectly competitive market. Market tends to be imperfect q. Hence, Pareto Efficiency cannot be achieved if rely on market mechanism in allocating resource in the economy

3. 1. Problems of Market Failures (2) q. More over, efficiency in allocation of resources is not the only concern of people. q. People need some other than resource allocation efficiency, such as more equal distribution of income, good condition of environment, elimination of unemployment and popverty

3. 1. Problems of Market Failures (3) q All these are beyond market concern. Since, the market only deals with efficiency q Government intervention is required to satisfy these other needs of people

3. 1. Problems of Market Failures (4) q. In short, if market fails to achieve pareto efficiency and fail to deliver the other needs of people the government has to substitute the role of market to satisfy all these q Market failures government intervention to improve welfare of the society

3. 2. Sources of Market Failures q. Public goods q. Externalities q. Natural monopoly q. Imperfect information q. Merit goods q Income distribution/equality q. Unemployment q. Inflation

3. 3. Public Goods (1) q Three main characters: ØNon-rivalry ØNon-excludable ØNon-congest

3. 3. Public Goods (2) q Three types public goods: Ø Excludable, non-rival public good impure public goods Ø Non-excludable, rival public goods impure public goods Ø Non-excludable, non-rival public good pure public goods

3. 3. Public Goods with Excludable, Non-rival Characters (1) q. Example: Free way q. Exclusion makes the service marketable q. Price > 0 even though MC =0 provision by private sector becomes feasible q But, private provision will not be Pareto optimum. q. Since, price will be determined not by market mechanism (S and D) MC = P, MC = 0, hence P = 0

3. 3. Public Goods with Excludable, Non-rival Characters (2) q. Price must be determined by mechanism other than market mechanism, such as government decision q. Consequently, the determined price may be too high or too low Provision will not be optimum q. Though not achieve ‘Pareto Efficiency’, private provision will result in social improvement

3. 4. Public Goods with Non. Excludable, Rival Public Characters (1) q. Common property resource q Example, ocean fishing ground q. If market mechanism over fishing q. Tragedy of the Common Individual rationality leads to collective disaster

3. 4. Public Goods with Non. Excludable, Rival Public Characters (2) q. Resource depletion and dissipation of economic rent q. Economic rent incentive for conservation q. Pareto inefficiency q. Government intervention is desirable to improve the condition

3. 5. Public Goods with Non-Excludable, Non. Rival Public Characters (1) q Example, lighthouse q Collective action to build q Free rider as constraint for collective action to take place q. If free rider problem is not controlable lighthouse will not be present q. Hence, government intervention is desirable in building the lighthouse

3. 5. Public Goods with Non-Excludable, Non-Rival Public Characters (2) q. However, when ‘ a privilege group’ exists private provision of the lighthouse is feasible even though free riders are at large q. But, the private provision will not be pareto efficiency undersupply q. Hence, government intervention is desirable to improve the supply

3. 6. Externalities (1) q. Two types by characters : Ø Negative e. g. air pollution by manufactures Ø Positive e. g. fresh air produced by Bogor botanical garden q Two types by sources : Ø Consumption demand curve Ø Production supply curve q Government intervension is desirable

3. 7. Positive Externalities: Problem of Under Supply of Goods Generating Positive Externalities Price Socially Optimum MSB MPC Ps Pm Qm Qs Note: Qm < Qs

3. 8. Negative Externalities: Problem of Over Production of Goods Generating Negative Externalities Price Socially Optimum MSC Ps Supply Curve MPC Pm MB Qs Qm Note: Qm > Qs Demand Curve

3. 8. Natural Monopoly (1) q Natural Monopoly? Ø Cost production declines as scale operation increase economies of scale ØCause large total fixed cost q. Example, ØProduction electricity Ø Airport service for airline landing and take-off

3. 8. Natural Monopoly(2) q Large economies of scale production is best by a single big firm q If monopoly right is granted to a private firm, it may not produce the required goods at the lowest cost q. Instead, it may produce at level that satisfy MR = MC to earn extra profit

3. 8. Natural Monopoly(3) If produced at MR = MC P > MC. Thus, social loss will prevail q Social loss pareto inefficiency q Government intervention is required to correct the condition q Ø Ø Government own firms (e. g. PT PLN and PT Angkasa Pura) But, government own firms often create another kind of inefficiency problem ?

3. 9. Imperfect Information (1) q Facts Ø Information is imperfect Ø Information is costly to acquire q Direct consequence Asymmetric information between market actors Ø E. g Buyer vs seller, employee vs employer

3. 9. Imperfect Information (2) q Consequences : Ø Moral hazard problem Ø Adverse selection problem Ø Missing markets (e. g absence of crop insurance in Indonesia ) q Government intervention is desirable to improve the condition

3. 10. Other Market Failures q Market is not concern about all these: Provision of merit goods Controlling inflation Poverty alleviation Controlling Unemployment Income redistribution q. Government intervention is desirable to address and solve them

3. 11. Government Failures (1) q Government intervention often fail to make improvement. Instead, it makes even worsened q Example, provision of electricity power by the government controlled monopolizing firm is often criticized of being inefficient

3. 11. Government Failures (2) q. Why government failures occur? ØConflict of interest’ ØPolitical motives ØRent seeking activities

3. 12. Readings q. Stiglitz, Joseph E. 2000. “Economics of the Public Sector”. New York: W. W. Norton and Company. Chapters 4 and 5 q Weimer, David L. and Vining, Aidan R. 1992. “Policy Analysis: Concepts and Practice”. New Jersey: Prentice Hall. Chapters 3, 4 and 5.