Market successes and failures
,Introduction
BIG IDEA : When prices/contracts do not capture important effects on others , private
choices can misallocate resources .
↓
Then we look for institutional or policy remedies
Caribbean
A
motivating case : Chlordecone in the
When people ignore external
effects ,
the allocation is
NOT PARETO EFFICIENT
W
Because there are feasible
Important Concepts could make
:
changes that one
better of without
person ,
* Private cost/benefits off
making the other worse
↳ imposed/received by decision maker
* Social costs/benefits
* External costs/benefits ↳
private I external effects
↳ imposed/ received by others
, Markets and market failure
When do markets work well ? When do markets fail ?
In perfectly competitive markets 1) prices do send
,
When not the
right messages ,
third-party effects
eg fossil fuels priced
with no , prices not for climate
transmit scarcity and
signals change
allocations efficient
.
2) for
are pareto When there is no market some
goods
d that matter to people ,
eg
clean air
Because prices
guide production , or
uncongested roads
consumption , investment and
innovation towards the Definition of Market failure =
of
best use resources A pareto-inefficient allocation
arising because
prices don't reflect social cost/benefits or
markets are missing
.
Diagnosis and Treatment
of market failure ?
wrong price
no market ?
of failure incomplete contract ?
1) Diagnose source
# Use the decter's approach
- >
-
2) Propose a treatment that moves private
!
choices closer to social interest
There are 4 treatments :
fix the price
signal (Pigouvian logic
·
If the market price is too low because it
ignores external costs ,
use :
1) Taxes on the harmful activity (eg carbon taxes)
mandates
2) Regulation/Standards Leg caps/technology
· The
goal is to
align private marginal cost with social marginal cost
,Introduction
BIG IDEA : When prices/contracts do not capture important effects on others , private
choices can misallocate resources .
↓
Then we look for institutional or policy remedies
Caribbean
A
motivating case : Chlordecone in the
When people ignore external
effects ,
the allocation is
NOT PARETO EFFICIENT
W
Because there are feasible
Important Concepts could make
:
changes that one
better of without
person ,
* Private cost/benefits off
making the other worse
↳ imposed/received by decision maker
* Social costs/benefits
* External costs/benefits ↳
private I external effects
↳ imposed/ received by others
, Markets and market failure
When do markets work well ? When do markets fail ?
In perfectly competitive markets 1) prices do send
,
When not the
right messages ,
third-party effects
eg fossil fuels priced
with no , prices not for climate
transmit scarcity and
signals change
allocations efficient
.
2) for
are pareto When there is no market some
goods
d that matter to people ,
eg
clean air
Because prices
guide production , or
uncongested roads
consumption , investment and
innovation towards the Definition of Market failure =
of
best use resources A pareto-inefficient allocation
arising because
prices don't reflect social cost/benefits or
markets are missing
.
Diagnosis and Treatment
of market failure ?
wrong price
no market ?
of failure incomplete contract ?
1) Diagnose source
# Use the decter's approach
- >
-
2) Propose a treatment that moves private
!
choices closer to social interest
There are 4 treatments :
fix the price
signal (Pigouvian logic
·
If the market price is too low because it
ignores external costs ,
use :
1) Taxes on the harmful activity (eg carbon taxes)
mandates
2) Regulation/Standards Leg caps/technology
· The
goal is to
align private marginal cost with social marginal cost
