Lecture 13: Market Failure, Voting, Edgeworth Box, and Efficiency in Production
In general when Q + Q^n and thee is an e loss
1) Public Goods - Non excludable, non rival (don't get used up), tend to be expensive (library). No one has incentive to pay due to non-excludability - . Markets fail. Non-rival-vertical sums of demand-add
Up prices willing to pay:
4 is reservation quantity - Don't buy more than 4 at any price. Kinck out the reservation of person with lowest .
cuts 0 left to 4. Plug 4 into . At demand is:
is which is higher than 40.
Who should pay?
Person 1 of cost
Person 2 of cost
i) Majority Rule - Who would win under MR?
ii) Dictatorship - Choose for everyone
iii) Borda - First Choice = 3 votes. Second = 2 votes Third = 1 votes used in San Fransisco to select mayor, Grammy
Be everyone's second choice
iv) Pairwise - Playoff between 2 and the wind fights the winner.
"set up determines outcome"
2, Common Goods - Rival, non-excludable. Trouble of congestions. Each person thinks only of themselves. Go vs Car.
Jimmy Bay street bigger
Edgeworth Box -
Dimention is aggregate supply
PPR - Pareto Preferred Region - points better than e. Anything between in difference curves.
CC- contract curves. Points that are best- where you can't do better.
why? if person A will give to Person B trades: for 1. Both can be better of trade.
Core is set of possible equilibria. Points are better & best. eC inside PPR. If both indifference are convert equilibrium is a single price.
Efficient if No remaining gains from trade
Efficiency in Production
Isoquants are tangent
Consistency in Mix
A, B & C are all efficient but which is best?
Marginal rate of transformation how much must five for
Concave because decreasing returns to scale
are upward sloping
At small because is small, is large.
At large. At must willing
is below the curves because it is not efficient
If , move right
If , move left
For an economy to be efficient
1) Very smart economist makes all decisions
Central Planning - Russia, China. Only work on a small scale.
2) Markets take care. both people set tangency, to same prices. if firms face same wages an interest, efficiency is automatic. max
Profix max firms, firms with competitive prices are efficient.
But Markets Fail!
Public & common goods & monopoly government intervention
is better but monopoly won't go there. Markets fail.
Because social cost is higher than price!
3) Coase Theorem
Assign property rights. Jia Jia has a right to clean air. Bailey will pay Jia Jia for the smoking damage. Bargaining must be possible.
ve ve: Apples & bees
ve ve: He is bad for you but you are good for him
ve ve: Bad for each other
New York Fries & Wendy's