Market Failure & Role of Regulation
Market Failure & Role of Regulation
Market Failure & Role of Regulation
Regulation
Ch 3 & 4
Econ 2.4
Learning
What is a government
Intervention?
Traffic congestion
Global Warming
Examples of goods which the market fails to provide in
adequate quantities
Roading
Health services
Waste disposal
Library services
Education
Train transport
Affordable housing
ange of Government Interventions
P$
MPC
MSC
MSB
Q
Job training and
education at work
Negative Externality of Production
P$
MSC
MPC
MSB
MSC
MPB
MSB
Alcohol Consumption
Q
Positive Externality of
Consumption
P$
MSC
MSB
MPB
Q
Education at University
Graphing externalities
Roles of Government
Task: for the three market failures listed above can you
Suggest a suitable government intervention
Analyse the effects of this intervention on the market.
Explain the overall effect on allocative efficiency and DWL
Framework
Competitive Market
Free Market
Forces Efficiency
Market
Regulation
Failure
Regulation Equitable
Distribution
Imperfect Asymmetry
Adverse Selection – Ignorant party lacks information while negotiating a
transaction
Moral Hazards – ignorant party lacks information about performance of
the of the agreed upon transaction
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EXTERNALITIES AND ENVIRONMENTAL
ECONOMICS
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EXTERNALITIES AND ENVIRONMENTAL
ECONOMICS
Other Externalities
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EXTERNALITIES AND ENVIRONMENTAL
ECONOMICS
When economic decisions ignore external costs, whether those costs are borne by one
person or by society, those decisions are likely to be inefficient.
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EXTERNALITIES AND ENVIRONMENTAL
ECONOMICS
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EXTERNALITIES AND ENVIRONMENTAL
ECONOMICS
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EXTERNALITIES AND ENVIRONMENTAL
ECONOMICS
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EXTERNALITIES AND ENVIRONMENTAL
ECONOMICS
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PUBLIC (SOCIAL) GOODS
In an unregulated market economy with no government to see that they are produced,
public goods would at best be produced in insufficient quantity and at worst not produced
at all.
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PUBLIC (SOCIAL) GOODS
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PUBLIC (SOCIAL) GOODS
Consumers acting in their own self-interest have no incentive to contribute voluntarily to the
production of public goods. Some will feel a moral responsibility or social pressure to
contribute, and those people indeed may do so. Nevertheless, the economic incentive is
missing, and most people do not find room in their budgets for many voluntary payments.
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Competitive Market
Free Market
Forces Efficiency
In the case of public goods and common resources, externalities arises because
something of value has no price attached to it.
“goods which will enjoy in common in the sense that each individual’s consumption
of such a good leads to no subtractions from any other individual’s consumption of
that good. For ex: fishing grounds, pastures, forests, water
Market
Regulation
Failure
Many goods have a public element but they are not pure
public goods – congested motorway
Power
Monopoly – A price maker compared to price
taker of a firm in competitive market
Telecommunications, electricity,
water, railways etc. are some
natural monopolies
(Mankiw, 2007)
Market
Regulation
Failure
Finally the market for poor quality of cars only exist – Good products and
good customers are under represented while bad products and bad
customers are over represented
(Pindyck and Rubinfeld (2001)
Market
Regulation
Failure
Legislation: laws and administrative rules are Enforcement is difficult and expensive
passed to prohibit or regulate behaviour that
imposes an EC, e.g. pollution permits
Education, campaigns and advertisements solve Benefits must outweigh the costs of implementation.
the problem of imperfect information by A lot of time may be needed for effects to be felt
allowing the external costs to be made known to
the consumer, discouraging demand
Market
Regulation
Failure
Legislation include regulation seatbelt usage, Enforcement requires constant checking which may
compulsory education etc. translate to high costs.
Market
Regulation
Failure
Imperfect Imposition of a lump-sum tax on a monopolist (shifts AC upwards), and supernormal profits are taken as
markets tax. Governments may also regulate MC/AC pricing for monopolies.
Natural Monopolies In the case of Natural Monopoly the essence of regulation is the explicit replacement
of competition with governmental orders with principal institutional device for
assuring good performance.
There are four principal components of this regulation that in combination distinguish
the public utility from other sectors of the economy: control of entry, price fixing,
prescription of quality and conditions of service, and an imposition of an obligation to
serve all applicants under reasonable conditions.
(The principles of economic regulation, A.E.Kahn)
Market
Regulation
Failure
Oil & Gas Natural Petroleum and Licensing, Tariff Petroleum and
Monopoly, fixation, QoS Natural Gas
Externalities Natural Gas (Quality of Service) Regulatory Board
Regulatory standards, Dispute Act 2006
Board Resolution Petroleum Act 1934
Petroleum and
Minerals Pipelines
Act, 1962