1. Market Failures and Government Policy

2. Market Failures: Externalities and Public Goods Society's microeconomic objectives equity social efficiency marginal social benefits and costs production where MSB = MSC

3. Market Failures: Externalities and Public Goods Externalities External costs of production MSC > MC

4. External costs in production MC = S D P Q1 Costs and benefits O Quantity

5. External costs in production External cost Q2 Social optimum MSC MC = S Costs and benefits D P O Q1 Quantity

6. Externalities External costs of production MSC > MC External benefits of production MSC < MC Market Failures: Externalities and Public Goods

7. External benefits in production MC = S Costs and benefits D P O Q1 Quantity

8. External benefits in production External benefit Q2 Q1 Social optimum MC = S MSC Costs and benefits D P O Quantity

9. External benefit External cost External costs and benefits in production MSC MC = S MSC MC = S Costs and benefits (£) Costs and benefits (£) D P D P O O Q Q Q Q 2 2 1 1 Quantity Quantity (b) External benefits (a ) External costs

10. Externalities External costs of production MSC > MC External benefits of production MSC < MC External costs of consumption Market Failures: Externalities and Public Goods

11. Externalities External costs of production MSC > MC External benefits of production MSC < MC External costs of consumption MSB < MB Market Failures: Externalities and Public Goods

12. External costs in consumption (MB) MU = D Q1 Costs and benefits D P O Quantity

13. External costs in consumption External cost (MB) MU = D Q2 Social optimum Costs and benefits D P MSB O Q1 Quantity

14. Externalities External costs of production MSC > MC External benefits of production MSC < MC External costs of consumption MSB < MB External benefits of consumption Market Failures: Externalities and Public Goods

15. Externalities External costs of production MSC > MC External benefits of production MSC < MC External costs of consumption MSB < MB External benefits of consumption MSB > MB Market Failures: Externalities and Public Goods

16. External benefits in consumption (MB) MU = D Costs and benefits D P O Q1 Quantity

17. External benefits in consumption External benefit (MB) MU = D Q2 Social optimum Costs and benefits D P MSB O Q1 Quantity

18. External benefit External cost Q Q Q Q 2 2 1 1 External costs and benefits in consumption Costs and benefits (£) Costs and benefits (£) P P P P MSB MB MB MSB O O Rail miles Car miles (b) External benefits (a ) External costs

19. Externalities External costs of production MSC > MC External benefits of production MSC < MC External costs of consumption MSB < MB External benefits of consumption MSB > MB Public goods Market Failures: Externalities and Public Goods

20. Externalities External costs of production MSC > MC External benefits of production MSC < MC External costs of consumption MSB < MB External benefits of consumption MSB > MB Public goods non rivalry Market Failures: Externalities and Public Goods

21. Externalities External costs of production MSC > MC External benefits of production MSC < MC External costs of consumption MSB < MB External benefits of consumption MSB > MB Public goods non rivalry non-excludability Market Failures: Externalities and Public Goods

22. Market Failures: Monopoly Power The demand curve under monopoly production at less than the social optimum

23. A monopolist producing less than the social optimum MC P1 MC1 AR MR Q1 Monopoly output £ O Q

24. A monopolist producing less than the social optimum Perfectly competitive output Monopoly output £ MC = MSC P1 P2= MSB = MSC MC1 AR = MSB MR O Q Q2 Q1

25. Market Failures: Monopoly Power The demand curve under monopoly production at less than the social optimum Deadweight loss under monopoly consumer and producer surplus consumer surplus

26. The demand curve under monopoly production at less than the social optimum Deadweight loss under monopoly consumer and producer surplus consumer surplus producer surplus Market Failures: Monopoly Power

27. The demand curve under monopoly production at less than the social optimum Deadweight loss under monopoly consumer and producer surplus consumer surplus producer surplus total surplus Market Failures: Monopoly Power

28. Deadweight loss under monopoly a Ppc Qpc MC (= S under perfect competition) £ Consumer surplus Producer surplus AR = D O Q (a) Industry equilibrium under perfect competition

29. The demand curve under monopoly production at less than the social optimum Deadweight loss under monopoly consumer and producer surplus consumer surplus producer surplus total surplus the effect of monopoly on total surplus Market Failures: Monopoly Power

30. Deadweight loss under monopoly Deadweight welfare loss b Pm MR Qpc MC (= S under perfect competition) £ Consumer surplus a Ppc Producer surplus AR = D O Qpc Q (b) Industry equilibrium under monopoly

31. Deadweight loss under monopoly Perfect competition a Ppc Qpc MC (= S under perfect competition) £ Consumer surplus Producer surplus AR = D O Q (a) Industry equilibrium under perfect competition

32. Deadweight loss under monopoly Monopoly Deadweight welfare loss b Pm MR Qpc MC (= S under perfect competition) £ Consumer surplus a Ppc Producer surplus AR = D O Qpc Q (b) Industry equilibrium under monopoly

33. The demand curve under monopoly production at less than the social optimum Deadweight loss under monopoly consumer and producer surplus consumer surplus producer surplus total surplus the effect of monopoly on total surplus Other problems with monopoly Market Failures: Monopoly Power

34. The demand curve under monopoly production at less than the social optimum Deadweight loss under monopoly consumer and producer surplus consumer surplus producer surplus total surplus the effect of monopoly on total surplus Other problems with monopoly Possible advantages from monopoly Market Failures: Monopoly Power

35. Other Market Failures Ignorance and uncertainty Immobility of factors and time lags Protecting people's interests dependants the principal–agent problem the problem of asymmetric information the need for monitoring poor economic decision making by people merit goods Macroeconomic goals Economists and policy advice

36. Government Intervention: Taxes and Subsidies The use of taxes and subsidies to correct externalities the optimum size of a tax

37. Using taxes to correct a market distortion MC = S D P Q1 Costs and benefits O Quantity

38. Using taxes to correct a market distortion External cost Q2 Social optimum MSC MC = S Costs and benefits D P O Q1 Quantity

39. Using taxes to correct a market distortion Optimum tax = MSC–MC MC Q2 MSC MC = S Costs and benefits P D O Q1 Quantity

40. The use of taxes and subsidies to correct externalities the optimum size of a tax the optimum size of a subsidy Government Intervention: Taxes and Subsidies

41. Using subsidies to correct a market distortion MC = S Costs and benefits D P O Q1 Quantity

42. Using subsidies to correct a market distortion External benefit Q2 Q1 Social optimum MC = S MSC Costs and benefits D P O Quantity

43. Using subsidies to correct a market distortion MC Optimum subsidy = MC – MSC MC = S MSC Costs and benefits P D O Q2 Q1 Quantity

44. The use of taxes and subsidies to correct for monopoly use of lump-sum taxes Advantages of taxes and subsidies Disadvantages of taxes and subsidies infeasible to use different tax and subsidy rates lack of knowledge Government Intervention: Taxes and Subsidies

45. Government Intervention: Laws and Regulation The use of laws and regulation Advantages of legal restrictions simple to understand safer when size of problem is potentially great quick to implement a good way of dealing with imperfect information Disadvantages of legal restrictions a 'blunt weapon'

46. Types of regulation The system of regulation in the UK UK regulatory bodies price-cap regulation the RPI–X formula Advantages of the UK system discretionary flexible incentive for firms to reduce costs Disadvantages of the UK system Government Intervention: Laws and Regulation

47. Other Forms of Government Intervention Changes in property rights the problem of limited property rights extending property rights limitations of this solution impractical in many situations problems of litigation questions of equity Provision of information consumer information information on jobs information to firms

48. Other Forms of Government Intervention Direct provision of goods and services the provision of public goods the need to evaluate costs and benefits of publicly provided goods the provision of other goods and services by the government social justice large positive externalities dependants ignorance

49. More or Less Intervention? Drawbacks of government intervention shortages and surpluses poor information bureaucracy and inefficiency lack of market incentives shifts in government policy lack of freedom for the individual

50. More or Less Intervention? Advantages of the free market automatic adjustments dynamic advantages of capitalism possibly high degree of competition even under monopoly/oligopoly Judging the arguments Should there be more or less intervention in the market? important to consider both costs and benefits of intervention moral issues problem of predicting effects of intervention

51. The Environment: a Case Study The environmental problem global and local environmental problems causes of the problems Market failures environment as a common resource externalities ignorance inter-generational problems

52. The Environment: a Case Study Policy alternatives charging for use of the environment emissions charges

53. An emissions charge MSC P2 MB = MSB L2 Costs and benefits (£) P1 = 0 L1 Level of emission

54. The Environment: a Case Study Policy alternatives charging for use of the environment emissions charges user charges

55. The Environment: a Case Study Policy alternatives charging for use of the environment emissions charges user charges optimum charge = external cost

56. The Environment: a Case Study Policy alternatives charging for use of the environment emissions charges user charges optimum charge = external cost green taxes and subsidies

57. The Environment: a Case Study Policy alternatives charging for use of the environment emissions charges user charges optimum charge = external cost green taxes and subsidies use of such taxes around the world

58. Green tax revenues as a % of GDP

59. Green tax revenues as a % of GDP

60. The Environment: a Case Study Policy alternatives charging for use of the environment emissions charges user charges optimum charge = external cost green taxes and subsidies use of such taxes around the world laws and regulations

61. The Environment: a Case Study Policy alternatives charging for use of the environment emissions charges user charges optimum charge = external cost green taxes and subsidies use of such taxes around the world laws and regulations advantages and disadvantages

62. The Environment: a Case Study Policy alternatives charging for use of the environment emissions charges user charges optimum charge = external cost green taxes and subsidies use of such taxes around the world laws and regulations advantages and disadvantages education

63. The Environment: a Case Study Policy alternatives charging for use of the environment emissions charges user charges optimum charge = external cost green taxes and subsidies use of such taxes around the world laws and regulations advantages and disadvantages education tradable permits

64. The Environment: a Case Study Policy alternatives charging for use of the environment emissions charges user charges optimum charge = external cost green taxes and subsidies use of such taxes around the world laws and regulations advantages and disadvantages education tradable permits advantages and disadvantages

65. The Environment: a Case Study How much can we rely on governments? governments must have the will to protect the environment depends on attitudes of various interest groups must be able to identify problems and appropriates solutions when problems are global: may require international agreements governments are likely to be more concerned with their own national interests