Market Failures
Frederick University
2014
Main Economic problems
Questions
Problems

What and how much


How


For Whom

Efficiency in
allocation
Efficiency in
motivation
Efficiency in
distribution
Market Functions
Achieve:
 Efficiency in allocation
 Efficiency in motivation
 Efficiency in distribution
Market failures


Market failures are all cases when
markets fail to perform their functions functional market failures, or
markets perform their functions, but the
outcomes do not fit the system of social
values
- social market failures
Public goods
I won’t use it and
I am not gonna pay for it!
Public Goods –
goods, which are nonrival and nonexcludable in consumption
Externalities
A chemical company
We’ll make
would like to build
them any color a plant here
you want
What about
our rivers?
Externalities
Externalities – cases where social costs and
benefits differ from private costs and benefits
Social cost
P
D
S – private cost
ps
p1
qs
q1
Q
P
S
P3
Merit goods
Merit goods – goods,
whose utility consumers
tend to underestimate
subsidy
D
P1
p2
q1
q2
Q
Demerit goods
Demerit goods – goods whose
consumers tend to overestimate
P
D
p2
tax
S
p1
q2
q1
Q
utility
Asymmetric Information
Racing? Let me just
get my car insurance!!!
Incomplete Markets


Bounded rationality
Moral hazard and adverse selection
Monopoly vs. Pure Monopoly


Monopoly – an ability to produce a good
or a service that others are not able or
allowed to.
Pure monopoly – a market structure,
determined by only one producer of a
good with no close substitutes
Natural Monopoly





Natural monopoly – a monopoly position,
determined by factors, which cannot be
replicated
Types of natural monopoly:
Monopoly, created by a possession of
resources, inaccessible to competitors
Monopoly, justified by economies of scale
Local monopoly
Economies of Scale
P
AC
AC
Q
Institutional Monopoly





Institutional monopoly – a monopoly,
deliberately created by economic decision
makers
Types of institutional monopoly:
Monopoly, created by a collusion, or a merger
Monopoly, created by institutional barriers to
entry to the industry
Government monopoly
Instability
Unstable macroeconomic equilibrium,
creating
cyclical
fluctuations
in
employment and price level
The Role of Government
Musgrave’s Three Branches
 stabilization
 allocation
 distribution
The government failure
Of course you may register
a complaint about all the
government paperwork, sir, ...
But it has to be in writing.