Economics Chapter 9 - Market Power, Market Failure & General Equilibrium

Pure Public Good

- Non-Excludable: can be provided to anyone and no one is excluded - Non portionable (share consumption): No matter how much you provide to someone, it is available to everyone (Ex. National defense, Radio stations, etc.)

Artificially created Market Power

Advantages that do not occur naturally in the Market Examples: Steroids & Social Norms (He is a doctor... she is a nurse, etc)

General Equilibrium

Analyzing the economy as a whole through how supply and demand interact and move towards a balance in an economy of multiple markets. (Creating a price equilibrium)

Relationship between Market Power and Social Institutions

Artificial Market Power can be created through political institutions BUT social institutions can change our perspectives: - What is appropriate for certain genders/races - Can also affect who hires you (powerful/invisible constraints that yield artificial market power for privileged)

Externalities and the Market

Causes Market Failure: - Externalities fail to assign/enforce property rights (ex. A firm which pollutes has a consequence of others but its effect is external to its own assessment of the costs of the activities) so no market is formed - No markets form -> no market coordination signal (price signal) is generated -> no way to quantify external effects of their activities - If you raise the cost a person pays, the level of activity will shift left (ex. governments taxing cigarettes to decrease smoking)

Economics of Scale/Scale of Production

Causes Naturally Occurring Market Power Changing the level of all inputs at once (doubling workers/size of factor) -> lowers the cost structure -> lowers selling price -> those with high cost structure can't compete

Marginal Social Benefits

Change in the benefits as a result of the consumption of an additional unit of a good or service

Positive Externalities

Create external benefits to others Marginal Social Benefit: MSB = MPB + (M)EB - MPB: Marginal Private Benefit Graphing: Lp < Ls: due to ignoring the positive external effects, the firm is under-doing its activity because it is not considering positive benefits of its activity (Socially inefficient) - Lp: Level of activity of Optimal Private - Ls: Social Level of activity

Risk Externalities

Creating an unintended risk for others (ex. Drunk Driving) Firms and individuals act in self-interest, but unintended costs and benefits affect others Market failure is why this happens - Lack of property rights: no price signal - Markets fail: Free-rider problem

Naturally Occurring Market Power

Does not come from distortion in the market process (it just happens) Ex. Economics of Scale & Giftedness Marketable -> No Competition -> Market Power

Externality & Property Rights

Due to failure to define property rights -> no market forms -> no price signal -> social inefficiency (a less than Pareto Optimal market outcome)

South African Apartheid

In Lize Venter's South Africa: resources were used to buy weapons, police vehicles etc in order to oppress people so the white minority could maintain power and enjoy huge "rents" -> white community had a large share of the smaller "pie" and it was at the society's expense Society didn't benefit from the imagination/creativity of the black community because they didn't have an incentive to contribute

No Market Power

Individuals have equal access to information and the market There are Natural vs. Artificial sources of Market Power

Equity (Market Power)

Market Power affect equity because it means those with power get a bigger share of the social product

Efficiency (Market Power)

Market Power reduces efficiency: Those with power have little incentive to exert them in the market competition because they will win anyways and those without power have little incentive because they will lose anyways

What happens when you exercise Market Power?

Not productive & less efficient - it is exploiting an advantage you have over the market

What happens when you relax No Market Power?

Reduces efficiency: Those with power have little incentive to exert themselves in the market because they will always win vs. those who have little power also have little incentive because they will most likely lose. Affects Equity: Those with power get a bigger share of the social product

Free Rider Problem

Since its non-excludable and non-partitionable...Once its provided to everyone, everyone else gets to enjoy all its benefits without having to pay for it (catching a ride on a "free" public good) The initial provider bears full burden of cost and no one else has to contribute since they can "ride along for free"

If there is an absence of any externality...

Societal level of cost and benefit equals firms cost and benefits and when determining an optimum, from a societal point of view, one should produce where MSB = MSC

Rent

The Power you have over people - it is a return not a productive contribution to market power

Marginal Private Benefits

The change in benefits as a result of the production/consumption of an additional unit of a good

Marginal Social Cost

The cost a society pays as a result of the production of additional units of a good or service

Marginal Private Costs

The cost for a producer as a result of the production of an additional unit of a good or service

Market Failure

When markets cannot form or can't coordinate well

Monopsony

a single buyer/employer - controls the demand side

Negative Externalities

creates "external costs" Marginal Social Cost: MSC = MPC + MEC - MPC: Marginal Private Cost Graphs: Lp > Ls means that, due to ignoring the negative external effects, the firm is overdoing its activity because it is not considering the full costs of its activity. The is Socially inefficient

Rent Seeking

*Using Resources* in pursuit of a power advantage - Artificially created Market Power

Rent Maintenance

*Using resources* to sustain a power advantage - Artificially created Market Power

Externalities

A positive or negative effect of a private activity on nominally uninvolved individuals - A cost or benefit that private individuals or firms don't take into account when making their activity decisions - It is external to the concerns of these private actors and therefore not a part of their considerations as they make choices - there must be a 3rd party

Monopoly

A single sellers - controls the supply side