EC2A3 Notes
1
Copyright © 2024 Rico Mak.
,Contents
MARKET SYSTEM........................................................................................................................................ 3
Roth (2017).............................................................................................................................. 4
GENERAL COMPETITIVE EQUILIBRIUM........................................................................................... 5
SOCIAL WELFARE....................................................................................................................................... 7
Backhouse et al (2020)........................................................................................................ 8
INEQUALITY............................................................................................................................................... 10
Starmans et al (2017)........................................................................................................ 10
Hufe et al (2018).................................................................................................................. 11
BEHAVIOURAL ECONOMICS................................................................................................................ 12
Grubb (2015)........................................................................................................................ 14
LOTTERIES AND RISK............................................................................................................................. 15
Stetzka and Winter (2021)............................................................................................... 17
INSURANCE MARKET............................................................................................................................. 19
Schmeiser et al. (2014)...................................................................................................... 21
ADVERSE SELECTION............................................................................................................................. 23
Wyness et al. (2021)........................................................................................................... 26
MORAL HAZARD....................................................................................................................................... 28
Lazear (2018)....................................................................................................................... 30
PUBLIC GOOD AND EXTERNALITIES............................................................................................... 32
Chan et al (2018)................................................................................................................. 35
Altundas et al (2021)......................................................................................................... 36
2
Copyright © 2024 Rico Mak.
,-----------------------------------------------------------------------------------------------------------------
MARKET SYSTEM
-----------------------------------------------------------------------------------------------------------------
Market System: a system for producing and allocating goods and services using price
signals, with two major features:
- Decentralization: people are not being explicitly coordinated by anyone when
they produce/consume
- Self-interest: people do not care intrinsically about those who they are producing
for/trading with.
Partial Equilibrium Model: the study of how equilibrium is determined by one market.
General Equilibrium Model: the study of how demand and supply conditions interact
in several markets to determine the prices of all goods.
- governments may still enforce property rights or enforce trades at agreed prices.
Market Goods: goods that are traded at defined prices.
- used to measure aggregate activities in the market economy.
- important for guiding policies.
-----------------------------------------------------------------------------------------------------------------
Microeconomic Models and Terminologies
Indifference Curve: the combination of preferred consumption bundles at a fixed level
of utility.
Marginal Rate of Substitution (MRS): the quantity of one good that cab be forego for
additional units of another good, at a given utility level.
MU X p X
MRS= =
MU Y pY
Pareto Efficiency: an allocation of goods where no one can become better off without
someone else being made worse off.
- occurs when MRS A=MRS B , where indifference curves are tangent to each other.
Edgeworth Box: a graphic representation of a pure-
exchange market with two goods.
- combines the indifference curves (map) of two
consumers on two goods.
- depicts an endowment economy, only exchange
occurs without production.
- trade cannot happen outside of the box
Contract Curve: a locus of pareto efficient allocations in an Edgeworth Box.
1. every endowment point must satisfy MRS A=MRS B
2. total consumption should exhaust available endowment for each good.
3
Copyright © 2024 Rico Mak.
, -----------------------------------------------------------------------------------------------------------------
Week 1 and Week 2 Readings
Roth (2017)
Repugnant Market: a market with goods or services that are deemed socially
unacceptable due to moral, ethical or cultural objections.
- e.g., selling organs or commercialising sexual favours(?)
Constraints from Repugnant Market: limitations or prevention of transactions that
restrict the efficient allocation of resources and inhibit potential gains from trade.
- e.g., patients needing transplants may not be able to receive on in-time, even if
there are potential sellers.
Organ Donations: considered as an act of altruism, having to contribute positively to
society rather than commercial transactions.
- enhances the common good without ethical concerns.
- non-financial: may exploit vulnerable populations or commodifying human parts.
Markets Ban: made through a combination of democratic processes, legal judgements
and ethical evaluations, which reflect the societal norms and values.
4
Copyright © 2024 Rico Mak.
1
Copyright © 2024 Rico Mak.
,Contents
MARKET SYSTEM........................................................................................................................................ 3
Roth (2017).............................................................................................................................. 4
GENERAL COMPETITIVE EQUILIBRIUM........................................................................................... 5
SOCIAL WELFARE....................................................................................................................................... 7
Backhouse et al (2020)........................................................................................................ 8
INEQUALITY............................................................................................................................................... 10
Starmans et al (2017)........................................................................................................ 10
Hufe et al (2018).................................................................................................................. 11
BEHAVIOURAL ECONOMICS................................................................................................................ 12
Grubb (2015)........................................................................................................................ 14
LOTTERIES AND RISK............................................................................................................................. 15
Stetzka and Winter (2021)............................................................................................... 17
INSURANCE MARKET............................................................................................................................. 19
Schmeiser et al. (2014)...................................................................................................... 21
ADVERSE SELECTION............................................................................................................................. 23
Wyness et al. (2021)........................................................................................................... 26
MORAL HAZARD....................................................................................................................................... 28
Lazear (2018)....................................................................................................................... 30
PUBLIC GOOD AND EXTERNALITIES............................................................................................... 32
Chan et al (2018)................................................................................................................. 35
Altundas et al (2021)......................................................................................................... 36
2
Copyright © 2024 Rico Mak.
,-----------------------------------------------------------------------------------------------------------------
MARKET SYSTEM
-----------------------------------------------------------------------------------------------------------------
Market System: a system for producing and allocating goods and services using price
signals, with two major features:
- Decentralization: people are not being explicitly coordinated by anyone when
they produce/consume
- Self-interest: people do not care intrinsically about those who they are producing
for/trading with.
Partial Equilibrium Model: the study of how equilibrium is determined by one market.
General Equilibrium Model: the study of how demand and supply conditions interact
in several markets to determine the prices of all goods.
- governments may still enforce property rights or enforce trades at agreed prices.
Market Goods: goods that are traded at defined prices.
- used to measure aggregate activities in the market economy.
- important for guiding policies.
-----------------------------------------------------------------------------------------------------------------
Microeconomic Models and Terminologies
Indifference Curve: the combination of preferred consumption bundles at a fixed level
of utility.
Marginal Rate of Substitution (MRS): the quantity of one good that cab be forego for
additional units of another good, at a given utility level.
MU X p X
MRS= =
MU Y pY
Pareto Efficiency: an allocation of goods where no one can become better off without
someone else being made worse off.
- occurs when MRS A=MRS B , where indifference curves are tangent to each other.
Edgeworth Box: a graphic representation of a pure-
exchange market with two goods.
- combines the indifference curves (map) of two
consumers on two goods.
- depicts an endowment economy, only exchange
occurs without production.
- trade cannot happen outside of the box
Contract Curve: a locus of pareto efficient allocations in an Edgeworth Box.
1. every endowment point must satisfy MRS A=MRS B
2. total consumption should exhaust available endowment for each good.
3
Copyright © 2024 Rico Mak.
, -----------------------------------------------------------------------------------------------------------------
Week 1 and Week 2 Readings
Roth (2017)
Repugnant Market: a market with goods or services that are deemed socially
unacceptable due to moral, ethical or cultural objections.
- e.g., selling organs or commercialising sexual favours(?)
Constraints from Repugnant Market: limitations or prevention of transactions that
restrict the efficient allocation of resources and inhibit potential gains from trade.
- e.g., patients needing transplants may not be able to receive on in-time, even if
there are potential sellers.
Organ Donations: considered as an act of altruism, having to contribute positively to
society rather than commercial transactions.
- enhances the common good without ethical concerns.
- non-financial: may exploit vulnerable populations or commodifying human parts.
Markets Ban: made through a combination of democratic processes, legal judgements
and ethical evaluations, which reflect the societal norms and values.
4
Copyright © 2024 Rico Mak.
