Notesale: Turn your study into money

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HULT International Business School
Economic Theory and Application (ECN102) - A
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➔ If market
are perfectly competitive, they will lead individuals to make voluntary choices that are in the
society’s interest
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Sources of market failures:

- Externalities ➔ Externalities are the effects of a decision on a third party that are not taken
into account by the decision maker
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- Negative EXT ➔ The effect of a decision not taken into account by the decision
maker are detrimental to others
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Marginal social cost > marginal private
cost
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- Positive EXT ➔ occurs when the effects of a decision not taken into account by
the decision maker are beneficial to others
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- The marginal social benefit > marginal private benefit
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- Other methods of dealing with EXT: incentives are more efficient than regulatory
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- Reduce consumption
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Inefficient ➔
achieving a goal in a more costly manner than necessary

- Tax incentives:
- Tax incentives policies
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- Much more efficient because the tax is in the price: the tax has made the
consumers internalize the externality
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- Market incentives policies ➔ still with the objective to internalize the
eternality, a market incentive plan ➔ a plan requiring market participants to
certify that they have reduced total consumption — not necessarily their own
individual consumption — by a specified amount
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- Voluntary restrictions ➔ it could be argued that when people make smth voluntary, it
makes them feel better off; but the largest problem with V solutions is that a person’s
willingness to do things for the good of ∑ generally depends on that person’s belief
that others will also be helping
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- The optimal policy ➔ A Policy in which the marginal cost of underlying the policy
equals the marginal benefit
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- Some environmentalists want to rid the world of all pollution, while most
economists want to reduce pollution to the point where the marginal cost of
reducing pollution equals the marginal benefit
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- There is no such thing as a pure public good: many of the goods that GVT provides
(education, defense, healthcare, infrastructures) have public aspects to them
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- Market value of a public good:
- The public good focuses on the group, the social benefit in the case of a PG is
the sum of the individual benefits (since each individual gets the benefit of the
group)
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The quantity of the good supplied
is not split up; the full benefit of the total output is
recieved by everyone
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➔ The total amount of a
private good supplied is split up among many
buyers

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- Since public goods are free of charge, individuals do not purchase public goods;
their demand is not revealed by their actions
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Through tax, individuals have an incentive to conceal their
willingness to pay
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- P
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- Adverse selection problem ➔ a problem that occurs when buyers and sellers have
different amounts of information about the good for sale and use that information to the
detriment of other
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- Signaling and screening:
- Signaling ➔ an action taken by an informed party that reveals information to an
uninformed party that offers the false signal that caused the adverse selection
problem in the first place
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- Policies to deal with informational problems:
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The Federal Trade Commission

➡

The Consumer Product Safety Commission

➡

The Occupational Safety and Health Administration

➡

The Food and Drug Administration

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the state licensing boards

- The commission and their regulations introduce restrictions that can slow down
the economic process and prevent trades that people want to make
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- If the GVT regulates information, these markets may b not develop; people
might rely on government instead of markets
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- GVT failures ➔ when the GVT intervention in the MKT to improve the mkt failure actually makes
the situation worse
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(2) GVTs don’t have enough information to deal with the problem
(3) Intervention in markets is almost always more complicated than it initially seems
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(5) GVT intervention leas to more GVT intervention

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