Market Failure Public Goods Common Property Dr D
Market Failure (? ): Public Goods & Common Property Dr. D. Foster - Microeconomics
What is “market failure”? When markets fail to achieve allocative and productive efficiency. When do markets fail? • • • Positive externalities Negative externalities Public goods Common property Asymmetric information
Public Goods Non-rival in consumption One person doesn’t use it up. Non-excludable Non-payers can’t be (easily) excluded. • • • For example: National defense Legal system Lighthouses TV and radio Roads
Public Goods Not all “publicly-provided” goods meet the test of being public goods. For example: • • Education Trash collection Social security National parks. . . • Roads & lighthouses ! • The legal system ? !
Public Goods Non-excludability problem leads to free riders. How do markets deal with this problem? • “Charge” differently - TV & radio ads • Find way to exclude - TV & cable/satellite • “Tie-in sales - lighthouses - shopping malls - gated communities
Graphical Analysis $10 $5 $5 MC $2 15 Tom 25 Sally 40 Market For private goods, the market demand is the horizontal summation of individual demands. Everyone pays the same price, price consumes differing amounts
Graphical Analysis $15 $10 MC 20 Market $10 $8 20 Sally For public goods, the market demand is the vertical summation of individual demands. Everyone consumes the same amount, amount pays differing prices. $5 $3 20 Tom
Cautions Government provision may not be desirable --The free rider problem is replaced with the forced rider --Government may be inefficient, inefficient imposing higher costs. --Without a profit motive, government may not innovate
Common Property • Weak incentive to preserve/protect. • Weak incentive to maximize value. • Who owns common property? • Fish in the ocean This is another free rider problem.
Common Property Supply Price D 2 D 1 P 1 Qmx Q* Q 2 Q - Fish
Common Property • What to do? -- Regulate use. . . - price/tax - standards - limits - prohibit -- Assign private property rights.
Property Rights • Coase – As long as transaction costs are low. • Not a market problem --Airspace. --Fish. --Endangered species. --Wild species. • Group. On and solving the free rider problem.
Common Property Case Study: The American Thanksgiving • In 1620, the Pilgrims arrived on the Mayflower. • The Pilgrims “farmed in common” for 3 years. • For 3 years they suffered from malnutrition and illness. • Then, it was decided to split up the land equally. • A bountiful harvest followed (Thanksgiving). • Thanksgiving (indirectly) celebrates private property rights!
Elephants & Property Rights • Elephants in Africa 1970 s - 1. 2 million 2014 - 700, 000 (e) 1980 s - 600, 000
Elephants & Property Rights Kenya – ivory burn of 10, 000 elephants! [>100 tons]
Property Rights & nonrenewable resources Can markets really work? Hotelling Principle: P S” S’ People treat exhaustable resources like any asset and want to max. value over time. S D Q The Simple Version - We can’t run out of. . .
Hotelling Principle • The more complicated story: – Asset value must grow at the market rate of interest to find equilibrium extraction. i = market return r = asset return % r – If asset value grows more slowly, extraction. i – If asset value grows faster, extraction. Q Q*
% r 15% 10% 7% 4% 0% i Q 1 Q 2 Q 3 Q* Q Q = amount of oil pumped out of the ground.
Asymmetric Information -Mutually advantageous trade doesn’t take place. -Trade takes place, but isn’t mutually advantageous. • • For example: Adverse selection The market for lemons Moral hazard Principal-agent problem
Market Failure (? ): Public Goods & Common Property Dr. D. Foster - Microeconomics
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