Lecture Notes: Market Failures and Government Intervention

Introduction

• Presenter: J Breed from reviewe eon.com
• Topic: Unit Six for Microeconomics focusing on Market Failures and Government Intervention.
• Accompanies the total review booklet available online.

Allocative Efficiency

• Definition: Producing where marginal benefit equals marginal cost.
  • New focus on Marginal Social Benefit (MSB) and Marginal Social Cost (MSC).
  • MSB: Benefit to entire economy, not just buyers.
  • MSC: Cost to society, not just producers.
• Graph Analysis:
  • MSC is upward sloping; MSB is downward sloping.
  • At low quantities, MSB > MSC → Underproduction, creates dead weight loss.
  • At high quantities, MSC > MSB → Overproduction, creates dead weight loss.
• Socially Optimal Output: Found where MSB equals MSC.

Externalities

• Definition: Costs or benefits affecting bystanders in the economy.
• Types of Externalities:
  • Production Externalities:
    • Negative (pollution)
    • Positive (safety training)
  • Consumption Externalities:
    • Negative (secondhand smoke)
    • Positive (vaccine herd immunity)

Negative Externalities

• Production:

  • MSC higher than private cost due to external costs.
  • Creates dead weight loss.
  • Government Intervention: Taxes, permits, or quantity restrictions.

• Consumption:

  • Subtract external cost from private benefit to find MSB.
  • Creates dead weight loss.

Positive Externalities

• Consumption:

  • MSB higher than private benefit due to external benefits.
  • Dead weight loss due to underproduction.

• Production:

  • External benefits reduce MSC.
  • Government can use subsidies to correct underproduction.

Public Goods

• Characteristics:
  • Non-rival: Consumption doesn't reduce availability.
  • Non-excludable: Can't prevent non-payers from consuming.
• Examples: National Defense (non-rival and non-excludable).
• Market Failure: Free rider problem leads to underproduction.

Government Controls & Market Impact

• Subsidies: Increase supply, lower prices, increase output.
• Taxes: Decrease supply, increase prices, reduce output.
• Price Ceilings: Natural monopolies regulated to reduce dead weight loss.

Income Inequality

• Lorenz Curve: Measures income distribution.
  • Closer to the 45° line indicates more equality.
• Gini Coefficient: Ratio indicating inequality.
  • 0 = complete equality, 1 = complete inequality.
• Taxes:
  • Regressive: Higher burden on the poor.
  • Progressive: Higher burden on the rich.
  • Proportional: Equal percentage regardless of income.
• Influence of taxes on income distribution, affects the Lorenz curve’s position.

Conclusion

• Review additional resources and materials for further study.
• Encourage engagement with additional learning tools provided by reviewe eon.com.