Digitally summarized economics notes for economics 114.
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UNIT 12: MARKETS, EFFICIENCY AND
* video 1 : Unit 12 PUBLIC POLICY
The market
largest cooperative project human
◦
the market may present the in
history
•
it is a fine-tuned machine that sends messages about the scarcity of
goods (
nobody controls it)
•
institutions matter
•
when firms have the power to set prices markets fail to maximize the total surplus : Pareto inefficient
,
•
when firms operate in perfect competition markets maximize the total surplus
,
in this unit, it shows that even competitive markets fail when market transactions impact others
•
market failure
Example : antibiotic resistance
overuse and misuse of antibiotics is a social dilemma
benefits the buyer and seller but the impact of their actions overlooked
every purchase ,
on others is
this is a market failure as the competitive produces much antibiotics
equilibrium
,
too
•
outcome is a Nash equilibrium
•
outcome is Pareto inefficient
* Another example of market failure is pollution
market failure occurs when people do not account for the costs of their decisions on others .
For markets to work well
,
institutions must :
•
protect property rights
•
enforce contracts
antibiotic effectiveness and and sold
Goods like clean water are not easily bought .
* There are no
property rights or contracts for external costs or benefits ,
leading to Pareto -
inefficient outcomes .
, Externalities
An externality of a choice is a cost or benefit imposed on a person who does not
play any
role in the choice
•
external costs and benefits are also known as external economies and dis economies
•
external effects are ignored by the agent making the choice as they do not affect the agent
,
Global negative externality
Global
warming
•
eaternat costs
marginal private cost ( MPC)
the cost for the producer of producing an additional unit of a
good ,
not taking into account
any
costs its production imposes on others leg .
Mc of producing bananas for growers]
marginal external cost ( MEC )
the cost of producing an additional unit of a good that is incurred by anyone other than the
the producer of the good leg .
Mc of banana growers on fishermen cost of harm on fish )
marginal social cost
sum of the private and external costs
MSC = MPC +
MEC
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