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transcript
Econ 1000 M2L3
C.L. Mattoli
1(C) Red Hill Capital Corp.,
Delaware, USA 2008
This week
Mod 2, part2: Markets in Action Chapter 4, Layton
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What you should already know You should understand how to think about
lost opportunity and opportunity cost. You should understand that, in a world of
limited time, people, natural resources, and productive capital equipment, that there is a limit on the amount of goods and services that can be produced at any one time.
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What you should already know You should be able to imagine that the
maximum capacity production of a mix of goods and services is described by the production possibilities frontier (PPF)
That any point to the left of the frontier is inefficient, and
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What you should already know Points to the right of the PPF are
unattainable by the economy, on its own, but a point to the right might be attained through trade with another economy.
You should understand how opportunity costs relate to moving from one point to another along the PPF.
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What you should already know You should understand the behavioral
underpinnings of the laws of supply and demand, which relate quantities supplied and demanded to price.
The laws state that the quantities supplied and demanded will vary with price.
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What you should already know The quantities supplied and demanded
are the dependant variables that depend on price.
Supply and demand curves, by themselves, don’t mean that much: they are only schedules of intentions for buying and selling quantities, if prices were at various levels.
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What you should already know It is only interesting when we put
supply and demand together and let them interact to result in an equilibrium price at which all quantities will be cleared in the market.
Graphically, in economics, the quantity is normally displayed on the horizontal axis and price is on the vertical axis.
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What you should already know That is contrary to the normal
convention in math. You may say “who cares?”, but there is a
reason that I bring this up: slope is always calculated as the change in the dependent variable per change in independent variable.
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What you should already know Also, laws are laws and cannot be broken or we
need a new laws. You should understand how non-price factors
can transform supply and demand curves into new curves.
You should be able to imagine how surplus and shortages will lead to behavior of the players in the market place that will eventually result in a unique ideal equilibrium market price and quantity that will exactly be cleared in the market.
Then, you will be ready to proceed through this next part of our analysis
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Learning objectivesModule 2 – Market analysis 2.2On successful completion of this part of the
module, you should be able to: Use the concepts of demand, supply, and
market equilibrium Use the market model to predict the
direction of change in prices and quantities caused by changes in the market-place, and by policy changes
Explain the concept of market failure and discuss causes of such failure
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What you should be able to do in the end Explain and illustrate the effects of a
change in demand on equilibrium price and quantity
Explain and illustrate the effects of a change in supply on equilibrium price and quantity
Explain and illustrate the effect of the policy of setting a price floor in a market
Explain and illustrate the effect of the policy of setting a price ceiling in a market.
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Overview
We studied concepts of opportunity cost and marginal analysis.
We looked at basic behaviorally based laws of supply, demand and market equilibrium.
In this part of the module, we apply these ways of thinking to the further studies of general markets.
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Overview
We examine how and why market equilibriums might change.
We also examine some failures of markets and look at various ways that governments intervene in markets and what happens when they do.
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Changes in Market Equilibrium
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Equilibrium changes Market Equilibriums can be constantly
changing. Equilibrium comes about because
behaviors cause an eventual exact balance of supply and demand at a certain price that will exactly clear a market.
Things in the market might change. If peoples’ perception changes or they get
more information, they can change their minds.
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Equilibrium changes Non-price factors can make changes of
whole supply and demand lines. Of course, if one of the lines changes,
supply or demand, there will be a new intersection point with the old other line, demand or supply.
If supply changes and demand remains the same, there will be a shift of equilibrium along the demand line.
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Equilibrium changes If demand changes and supply remains
the same, a new point will be reached on the supply line.
Changes in supply will cause a new equilibrium point on the old demand line.
Changes in demand will lead to a new intersection point on the old supply line. An example of a dynamic market in which prices change all day long are the stock markets and the commodities markets.
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Equilibrium changes There, as new buyers and sellers and new
information come into the markets throughout a day equilibrium prices constantly change.
We shall discuss reasons for such changes and can show the situations, graphically, for changes in one curve or the other, in order to further understand the processes at work.
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Changes in demand
Only non-price determinants will shift a demand curve.
Simple changes can come from more buyers entering a market.
Advertising, word-of-mouth, or information can change demand.
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Changes in demandExample: demand rises Consider demand at a hair cutting salon. If
everyone tells their friends that one of the boys there gives the most beautiful haircuts of anyone in town, the demand curve will shift to the right, and more haircuts will be demanded at each possible haircut price.
In the mean time, supply remains the same. The boy only works so many hours a day, and he can only cut so many heads of hair.
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Changes in demandExample: demand rises (contd.) This will mean that there is a shortage in the
market. As a result, the price of his haircuts will be
bid up and he will eventually work more hours because he is willing to work more and give more haircuts at a higher price on his new supply schedule.
We illustrate the situation in a slide, below.
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Changes in demandExample: demand falls Next, consider what might happen to
the demand for large SUV automobiles, if the price of gasoline triples and it is expected to remain there or higher.
Automobiles and gasoline are complementary goods, and the result of such a rise in petrol prices would likely be a decrease in the whole demand schedule for SUV’s.
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Changes in demand
That will leave a surplus in the market. As a result, the price and quantity
supplied will eventually be arrived at a lower price and quantity point along the automobile makers’ supply curve.
We show the 2 situations in the next slide.
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Effects of demand shifts on equilibrium Diagrams and causal chains
D1 D2 D2 D1P P
Q Q
S S
Increase indemand
Increase inEquilibrium price
Increase inQuantitysupplied
Decrease indemand
Decrease inQuantitysupplied
Decrease inEquilibrium price
When Haircut demand rises When SUV demand falls
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Extended causal chains We expand the cause and effect chains as
Increase indemand
Increase inEquilibrium price
Increase inQuantitysupplied
Decrease indemand
Decrease inQuantitysupplied
SuppliersWill begin toDiscount
Shortagewill obtain
Demanderswill begin to bribe suppliers
SurplusWill exist
Decrease inequilibriumPrice
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Changes in supply
Now, lets look at what happened, if we keep a constant demand curve and change supply.
The supply curve can be transformed into a new curve by various non-price factors of the supply equation.
The market will adjust, and a final new equilibrium will be reached at the new intersection point of the new supply and demand curves.
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Changes in supplyExample: technology expands supply Suppose that a new process was developed that
allows palm oil producers to squeeze 10% more oil of palm leaves.
Then, with only that technological change, the whole supply curve would shift to the right, and more palm oil will be offered at every price in a new supply curve.
In turn, since the industry is now able to supply larger quantities at every price there will be a temporary glut of palm oil on the market at the current equilibrium price.
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Changes in supply A surplus will exist because at the balancing
point of old demand with old supply, the market was just clearing the former amount of palm oil offered at an equilibrium price, and, now, suddenly there is more available than can be cleared at that price.
The signals to suppliers, seeing the glut, will lead them to begin to drop the price.
They will also be willing to offer less in the marketplace as they charge less: they will move down their new supply curve.
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Changes in supply
The stopping point on the way down will be the intersection point of the new supply and the old demand curves.
At that point, supply will be ahead of old supply but behind the glut supply level, and the price will be that which clears the market.
A new equilibrium will obtain.
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Changes in supply Supply can also decrease, as we have seen with
oil production over the last thirty years. Markets for food stocks can also display decreases in supply, as, for example, when there is a frost in early be spring, and the orange crop suffers.
Again, we can analyze the affect on market equilibrium, and examine the processes at work in the marketplace that will take us there.
Although we assume that the demand curve remains unchanged, there could be situations in which both supply and demand change.
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Changes in supply Example: supply recedes: Suppose that police crack down on street vendors
selling illegal copies of DVD’s on the streets of Guangzhou.
As a result, supply will decrease, and there will be a shortage of illegal copies of DVD’s on the streets of Guangzhou.
Some people will begin to bid up DVD prices to make sure that their neighborhood black market DVD dealers save DVD’s especially for them.
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Changes in supply
We will move up the old illegal DVD demand curve until we reach a price at which illegal DVD’s are exactly cleared in the marketplace.
A new equilibrium price and quantity will eventually obtain at the intersection of the old demand curve and the new supply curve.
The price will be above the old price and the quantity cleared will be down.
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Supply Changes Causal chain and graphs. Note there is a mistake in the arrow for price in the graph in the book on
page 92 for decrease in supply
S2S1 S1S2
P P
Q Q
D D
Increase insupply
Decrease inEquilibrium price
Increase inQuantity demanded
Decrease insupply
Increase inEquilibrium price
Decrease inquantitydemand
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Extended causal chains We expand the cause and effect chains as
Decrease insupply
Increase inEquilibrium price
Decrease inQuantitydemanded
Increase insupply
Increase inQuantitydemanded
SuppliersWill begin toDiscount
Shortagewill obtain
Demanderswill begin to bribe suppliers
SurplusWill exist
Decrease inequilibriumPrice
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Changes in both There’s no reason that supply and demand cannot
both change. To truly analyze an exact new equilibrium point
for that situation, we would need more precise supply and demand schedules than the general graphical representations that we have relied on when only one, supply or demand, was changed.
There are 4 possible scenarios with both changing. Both could increase, both could decrease, or one could go one way and the other, the other.
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Changes in both
If both curves change, the outcome for price and clearing quaintly after the changes may be more or less than before the changes, depending on the size and direction of each change.
Using the logic that we have developed for the cases of one changing, we could follow the forces that will come to bear on reaching a new equilibrium price and a new quantity that will clear in the market.
We show a few possibilities in the next slide.
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Changes in both We show some of the possible combinations of
dual changes in supply and demand, although there are additional possibilities.
Even the outcomes shown could be different for the types of changes displayed
S2S1 S1S2
P P
Q Q
D1 D2D2 D1
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Laws are laws: Trying to Violate the Laws
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Government Dickering in Markets Governments all around the world try to affect
some of the markets in their economies. Their objectives are either to set minimum or
maximum prices in certain markets. Thus, they seek to either prevent some prices from
rising to equilibrium or to keep others above equilibrium
For example, a favorite market in which governments like to set price floors (minimums) is wages.
A market in which they like to set price ceilings (maximums) is the market for rental housing.
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Ceilings A price ceiling is a legally established
maximum price that a seller can charge for a good or service
Rent controls are common in many U.S. cities. In other countries, government housing is subsidized to make rental prices lower.
The rationale for rent controls or subsidies is to provide a necessity to people that would be unaffordable many people at the true equilibrium price.
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Ceilings
So, will the market for rental units simply conform to the situation that the government dictated, or will market forces still be at work?
We shall see why many economists believe such controls are counter-productive and, in fact, lead to other more subtle costs.
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Ceilings Assume that market supply and demand curves
are as shown in the figure, below, and equilibrium would be at a point with rental price of $600 per month and a cleared quantity 6 million units per month.
Supply and demand theory will predict that, if a ceiling of $400 per month is artificially placed on market price, there will be 4 million units supplied, while demand is for 8 million units per month.
The result is that a shortage of 4 million units per month will persist in the market (see next slide)
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Ceilings Graphic effect of rental ceiling on market.
S
P
Q
D
$400
600
$600
400 800
$200
200
$800
1000
HousingShortage
Millions of units per month
$1000Ren
tal price p
er m
on
th
Price CeilingOn rents
Quantity demandedExceeds quantitySupplied at price
Shortage ofUnits obtains
Causal Chain
Ceiling
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Ceilings: costs and bad behaviors Of course, rigging a market and not allowing market
forces to prevail will result in some adverse affects.
Tenants:
1. Tenants will spend more time looking for housing or spend more time on waiting lists to get housing. This is opportunity cost to the tenant.
2. The artificially low rent might evolve a black market, an illegal hidden market, by tenants. They might sublet their units at a higher price to someone else and make an illegal profit for themselves.
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Ceilings: costs and bad behaviorsLandlords Because of substandard rents landlords might
skimp on maintenance and leave units in bad or even dangerous repair.
Landlords might also resort to discrimination and preferential treatment of renters in the market by giving preference to family and friends, even though they come onto lists behind others.
In the end, ceilings lead to inefficient and undesirable behavior
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47
Price Ceiling & Revenues
P
Q
S0
P0
Q0
D0
P1
Q1
Revenue (= PxQ) at Equilibrium
Revenue with ceiling
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Ceiling: Economical alternatives Economists might suggest an alternative of subsidizing
rental payments, directly, for low income people. Then, low income people will be able to afford rentals at
the market price. More importantly, market forces will be allowed to
determine rental prices and availability, and the market will clear with no shortage, surplus, inefficiency, or misbehavior.
Although price ceilings were common throughout the world in the 20th century, they are steadily disappearing as governments allow markets to work on their own, while they seek better alternatives to increase their citizens’ general welfare
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Break time
Take 10 minute break Use time to come up and ask questions
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Floors A floor is a legally established minimum that a
seller may charge for a good or service. A common price that governments put floors on
is wages: minimum wages. Assume that we have the usual downward sloping
demand schedule for unskilled labor. At a higher wage, business will hire less unskilled workers; at a lower rate, they will hire more workers.
Concerning supply, workers will be willing to give up more free-time and work more hours in a year for higher wages and will want to work fewer hours for less wages.
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Floors: minimum wage If left to their own bargaining, the market would
establish an equilibrium price and a corresponding quantity of labor employed.
The intention is to help unskilled labor have a higher standard of living, but will a minimum wage really help?
First of all, the supply of willing workers will expand to the point on the supply curve corresponding to the minimum wage price.
On the other hand, demand will be up the demand curve to the point represented by the minimum wage.
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Floors: minimum wage Unfortunately, there will be less of a demand for
unskilled labor than there is supply, and unemployment will obtain.
Rather than pay such a high price for unskilled workers, companies will add skilled workers or replace labor with equipment.
Thus, as a result of enacting a minimum wage, the government unwittingly encourages business to use less unskilled labor, and there will be a higher rate of unemployment in the unskilled labor market.
Thus, the whole exercise is counterproductive.52
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Minimum wage: economical alternative Many economists would suggest that rather than
fixing a minimum wage, the government, just as in the case with rent ceilings, would do better by subsidizing workers ’ wages by giving them welfare payments, directly.
Again, it appears that it is more efficient to allow the markets to work on their own and to find an alternative means of trying to help the less well-off members of the society.
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Minimum wage: counterarguments However, other economists argue that by
installing a minimum wage, employers will ultimately be forced to upgrade the skills and productivity of workers.
Still others argue that at least some of the less better off would be raised up in their standards of living and that the resulting unemployment of others is a fair price to pay for to pay for the majority.
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Graphical minimum wage Classical graphical minimum wage market.
S
P
Q
D
$4
400
$6
300 500
$2
200
$8
600
100,000’s annual unskilled labor hours
$10
Ho
urly w
ages u
nskilled
lab
or
Price FloorOn Wages
Quantity demandedFalls short of quantitySupplied at price
UnemploymentOf unskilled workers
Causal Chain
Floor
Unemployment
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Market Failures
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Why fail? We have learned how markets are supposed to
operate/ Normally, the price system is expected to
efficiently coordinate society's economic transactions, but there can be instances of failure of the market system.
Market failures mean that the price system fails to operate efficiently, and society loses benefits.
We shall look at 4 causes: lack of competition, externalities, public goods, and income inequality.
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Lack of competition The market theory assumes that there is intense
competition among both consumers and producers.
If producers collude to restrict output, artificially raising the price above its natural equilibrium, they will be able to reap extra profits.
Especially new markets or markets that are little understood may have a lack of competition.
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Lack of competition
That will mean that prices and quantities are not what they could be.
By subverting consumer sovereignty, business might reduce the well-being of society by wasting resources or by retarding technology and innovation.
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How can they do that? Anticompetitive behavior is illegal in many
countries, but it still exists in the world. Many countries even have government organizations to keep a watchful eye and protect society against such behavior.
There is the ACCC ( Australian Competition and Consumer Commission) in Australia, the Federal Trade Commission (FTC), in the U.S., and the European Union’s Competition Bureau, in Europe.
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How can they do that?
Cartels, groups of producers, band together to restrict output, and rig prices.
Two of the most common examples of cartels are the petroleum producer cartel, OPEC, and the diamond producers’ cartel. Both restrict output to keep prices at artificial levels.
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Rigging the market for supply We understand that the way markets
work is that supply curve intersects with the demand curve, and that intersection point will be the price at which the market will exactly clear the quantity offered for sale.
That process assumes consumer sovereignty.
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Rigging the market for supply Then, suppliers will offer what they are
comfortable with, considering their profits versus opportunities, and their offerings will be displayed in a supply schedule.
Consumers will compete for supplies by bidding up prices to the point at which their demand exactly clears the market of all supply.
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Rigging the market for supply However, if suppliers conspire to restrict their
output, they can offer supplies along a supply curve that does not represent their efficient decision-making or use of resources.
By moving their supply curve upward, they will be able to move the intersection point with the demand curve to a higher price per unit at less output than they could efficiently produce and they can make excess profits.
We show the potential situation in the next slide.
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Rigging supply: higher prices, less available In the figure we show the natural supply and demand
curves, along with a restricted collusive supply line. The result is a new intersection point on the demand line
with a higher price than the true free-market price and less available quantities
SfreeD SRestricted
Pfree
Qfree
P
QQresticted
Prestricted
Restricted supply market
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Case study: Commissions on stock trades in the U.S. Corporate Stocks are traded on stock exchanges and also
OTC. There are barriers to entry in both. For example, a
membership on the New York stock exchange (NYSE) will cost over $1 million, and to trade on the NASDAQ market means membership in the NASD. The cost to go through the process of filing and registering as a BD was around $50,000.
In the early 1980’s, commissions on buying stock were as much as $1 per share.
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Case study: Commissions on stock trades in the U.S. There was basically a lack of competition in
commission business because of the limited number of seats on the NYSE and the high cost of a seat. In the mid-1980’s, an apparent loop-hole in the rules of the SEC and the NYSE was exploited: If you were a registered broker-dealer (BD), you could gain access to the commissions charged for brokerage and clearing, about 1.5 cents.
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Case study: Commissions on stock trades in the U.S. In addition, you would also have advantageous
capital, margin, and short requirements, similar to NYSE members.
People began to take advantage of this template. With the growth of day trading salons and internet trading, some of those people built businesses around trading prices of 5 cents per share, and commissions have come down substantially over the past 20 years for all broker accounts.
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Externalities Markets can display failure because of side-
effects called externalities imposed on people other than the actual consumers and producers in a market.
Externalities, also called spillover effects or neighborhood effects, are costs or benefits to people, third parties, other than the actual market participants.
Thus, externalities can be either positive or negative.
Externalities can be consumption-derived or production-derived.
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Externalities: simple examples If the person next door to you in the dorm,
plays loud music late at night, it might interfere with either your sleep or your studying.
It is a negative consumption-based externality, based on your neighbor’s music consumption habits.
You drive through a community where all the houses are beautifully painted and have magnificent gardens.
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Externalities: simple examples You derive pleasure from the scenery, even
though you had to contribute nothings, and you enjoy the fruits of other people’s production efforts.
It is a positive production-based externality. Another example of a positive production
externality is spillover of technological developments from R&D of one firm to others. This is actually very important to growth of an economy.
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Externalities: some are of great concern Externalities are not a minor aspect of market
failure. They can have enormous impact on the quality of life.
Remember that people are self-interested. Sometimes self-interest can have a damaging affect on society, and sometimes it can have a positive affect.
We shall look at major examples of both: pollution as a negative and immunization against disease as a positive.
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Pollution: negative production externality Consider a steel industry that uses coal to
produce steel without pollution-control equipment to limit the amount of poisonous smoke and ash poured into the earth’s atmosphere.
The effect of the foul air is to reduce property values, increase the cost of health care, contribute to global warming, and generally erode the quality of life for third parties.
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Pollution: negative production externality Because of these detrimental external
affects, the equilibrium price in the market does not reflect the true cost of steel production to the society.
The equilibrium price of steel is too low because steel supply curves do not reflect those costs, and the output is too high. The output is above what should be socially desirable.
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Pollution: true costs If producers supply curves were, somehow, to include
all of the external costs, the supply curve would shift upward, and the equilibrium price would be higher than the existing market and suppliers would produce less output as shown, below.
SNPCD SPC
PNPC
QNPC
P
QQPC
PPC
Pollution costs and supply
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Pollution externalities: costs restrict supply You might notice that the result is the same result that
we found for an industry of collusive producers. In a collusive market, supply is restricted by
producers to increase price. In pollution, society forces costs onto the producer to
pay for the cost of the external losses to society that he causes.
By understanding the true costs of production that is produced by industries or companies that pollute the environment, society can begin to find remedies to assure that the final equilibrium prices and quantities reflect those costs.
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Pollution costs: remedies There are 2 basic approaches to adding the costs of
externalities to producers costs and changing the supply curve: taxes and regulation.
The government can charge a tax to producers. The tax is an added cost of production, which will be passed on to consumers of their product, and a new supply curve will intersect demand at a higher price and lower quantity. The taxes can be used to compensate the third parties affected by the damaging behavior of the company.
Pollution taxes might also encourage producers to install pollution control devices, on their own, in order to pay less tax.
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Pollution costs: remedies The other alternative is to make regulation
requiring companies to reduce pollution. In this remedy, producers are forced to purchase, install and maintain pollution control equipment. Then, pollution will be reduced, and the costs to society will be reduced or eliminated.
The extra cost of equipment will cause the cost of production to increase, and equilibrium will obtain at a higher price and lower output.
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Pollution costs: remedies However, the cost of complete elimination of
pollutants is prohibitive, so not all pollution will be eliminated through equipment. Moreover, producers can cheat on their polluting.
The tax method can eliminate all of the cost, but is still left with the uncertainty of the real long term costs of pollution.
Most countries prefer the tax approach because it can cover costs and it is easy to adjust.
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Immunization: case study In pollution, we found that the supply curve can
understate the costs to society of production. In immunization, the demand curve can understate benefits to society.
Modern medicine provides vaccines against many debilitating illnesses. People usually have their children immunized when they are very young.
People other than those paying for immunization, free-riders, because since many people pay for inoculation the disease becomes less common.
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Immunization: case study Thus, the demand curve does not truly reflect all
of the external benefits, and adjustment must be made to account for them.
Because demand does not reflect all benefits, producers will produce less at lower prices, and there is inefficient allocation of resources to the diseases immunization effort.
Now the government can use two methods to change the demand curve: subsidies or regulation.
We show the situation graphically, in the next slide.
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Immunization: unpaid benefits Demand does not reflect reality because free-riders do not
pay for but receive the benefits of immunization. Thus, equilibrium price and quantity are too low.
DIB SDNIB
PNIB
QNIB
P
QQIB
PIB
Immunization benefits and demand
82
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Immunization: redistributing unpaid benefits Refunding subsidies are one means of
paying for benefits. This approach involves a payment by the
government to people who have their children immunized.
In this manner, dollar benefits are gained only by those who pay for immunization.
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Immunization: redistributing unpaid benefits Others still benefit but the cost of the
benefit is also shifted to those who do not pay for it directly.
The monetary payment might induce parents to have children immunized.
Only when they are immunized can a parent be truly confident of no disease and extra costs for medical care.
Demand may shift.
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Immunization: redistributing unpaid benefits What would happen, if immunization was
completely subsidized? Would everyone simply choose to inoculate their children, and the problem completely solved?
The answer to that has been seen in Australia’s decline in immunization even though it is completely subsidized by the government.
That leads us to consider an alternative for capturing, quantifying, and costing out the benefit of immunization: regulation.
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Immunization: redistributing unpaid benefits Another means of ensuring that all pay for the
benefit of immunization is to regulate and require that all children, by a certain age, must be immunized against certain major diseases.
In the U.S., for example, children are, on the one hand not allowed to enroll in school, if they have not been immunized against certain diseases, like polio or measles. On the other hand, children of school age are legally required to go to school.
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Immunization: redistributing unpaid benefits
In any event, although it may not be completely enforceable, laws requiring immunization will shift the demand curve right, and a proper efficient equilibrium will occur at a higher price and output, thus encouraging the health industry to continue to pursue immunization research and delivery
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Public Goods
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Public Goods There are certain goods and services that are
valuable to the welfare of the society but that would not be made available and purchased in sufficient quantities without government intervention.
Public goods are things like national defense, interstate roadways, and police protection,
Public goods are goods and services that, once produced, have 2 special characteristics:
1. The benefit is collectively consumed.2. There is no way to prevent free-riders from
taking advantage of the benefit,89
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Immigration control: an example Suppose that, instead of the national coast guard
patrolling the coast of Australia, a private firm offered to guard against the entry of illegal aliens, and that the service was offered to individuals.
Then, all individuals, in the society, could decide whether or not they want to pay for the coast guarding service.
The result will be that some, if not all, members of the society will attempt to free-ride, while reaping the benefits that others pay for, and the market will either under-produce or not produce.
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Providing public goods Because these markets are likely to fail,
otherwise, governments tax their citizens and provide public goods and services for them.
The government does not have to undertake production, itself. It can contract out the production to the private sector.
It can force payment and eliminate the free-rider problem.
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Income inequality
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Inefficiency versus inequality In the previous market failure situations that we
described, the markets are inefficient because they allocate too many or too few productive resources to producing particular goods or services.
Even when markets are operating efficiently, they may result in a very uneven distribution of income among the members of a society.
Professional basketball players, CEO’s and doctors get huge incomes, while the unskilled and disabled get small or no wages.
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So what? Some politicians and economists argue
that something should be done about this inequality.
Others point out that income inequality provides incentive to gain skills and get a higher income.
Many governments, nonetheless, do feel a need to do something to cure some of the inequality.
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So what? They provide welfare payments to the
poor or disabled. They have progressive income tax systems in which higher amounts of income are taxed at higher percentage rates, like those in Australia.
Others argue that high earners should be taxed less to provide incentive for them to work hard and continue accumulate wealth
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Ask Yourself1. How can you find producer’s total revenue
from the supply-demand equilibrium graph?
2. Name several reasons/situations that the government might get involved in markets.
3. What do you expect will happen if a price ceiling is lifted in a market? A price floor?
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Exam Prep ProblemsA shift in either the demand or supply curve for a
particular good will cause a change in the equilibrium price and quantity of that good. If the price of the good increased:
(a) describe the changes in those factors that would be likely to cause an increase in price;
(b) illustrate the effect of these changes on the price and quantity equilibrium; and
(c) explain and show how the price elasticity of demand will affect the sellers’ revenue should there be an increase in the price of this good.(Next week’s lecture)
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Problems due in tutorial
Chapter 4 Problems 1-10 Multiple choice 1-12
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Next week
Next week we discuss the concept of elasticity, which will require some mathematical understanding.
We shall cover chapter 5.
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END
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