Lecture Notes In Introductory Microeconomics PDF

LECTURE NOTES IN INTRODUCTORY MICROECONOMICS Lecture Note 8.1 Market Failures: Imperfect Competition and Asymmetric Information Tereso S. Tullao, Jr., PhD De La Salle University Manila, Philippines 2021  Questions to be Answered 1. What is meant by market failures? 2. Why does the market...

LECTURE NOTES IN INTRODUCTORY MICROECONOMICS Lecture Note 8.1 Market Failures: Imperfect Competition and Asymmetric Information Tereso S. Tullao, Jr., PhD De La Salle University Manila, Philippines 2021  Questions to be Answered 1. What is meant by market failures? 2. Why does the market fail when competition is imperfect? 3. What is meant by asymmetric information? 4. Why does the market fail when there is asymmetric information? 5. How do we address these market failures?  Market System and Its Benefits Market system as a system of allocation has a mechanism meant to realize optimal welfare price in any transaction in the market system reflects marginal social benefits and marginal social costs resources are efficiently allocated consumer surplus is maximized producer surplus is maximized highest level of income highest level of satisfaction  Market System Consumer Surplus and Producer Surplus Price, P Consumer Surplus S= MPC= MSC difference between the price B consumer is willing to pay (marginal utility) and the actual market price E PEBE PE Producer Surplus difference between the price seller is willing to supply D= MPB =MSB (marginal cost) and the actual A market price 0 QE Quantity, Q APEB Total Surplus : ABE  Concept of Market Failures Market Failures Situations when the market system fails to realize the provision of optimal welfare market price does not reflect marginal social benefits and marginal social costs resources are inefficiently allocated total surplus (CS+PS) is not fully realized highest level of income is not realized highest level of welfare is not attained  Concept of Market Failures Situations when Market Failures Occur Imperfect competition Asymmetric information when market power when uneven information deviates the market leads to inefficient price from marginal decisions social cost Externalities Public goods market mechanism market mechanism is fails to account for inadequate in providing spillover effects of goods that are commonly private market consumed transactions  Imperfect Competition Imperfect Competition as Market Failure Perfect Competition production and consumption is optimal price reflects marginal social benefit and marginal social cost MPB = MSB = P = MSC = MPC Monopoly production and consumption is not optimal price does not reflect marginal social cost MPB = MSB = P > MSC = MPC  Monopolistic Market Price, P B S=MPC =MSC Equilibrium Price and Output Monopoly and Perfect Competition Cost, C Monopoly Perfect Competition Output: 0QM Output: 0QC M PM C Price :0PM Price :0PC PC Total Surplus: ABMT Total Surplus: ABC T A Loss in Total Surplus Monopoly: TMC due to underproduction and underconsumption A MR D = MPB = MSB 0 Quantity, Q QM QC  Asymmetric Information Asymmetric Information Information is unevenly distributed among buyers and sellers leads to wrong decisions including misallocation of resources those with more information can exploit those with limited information Requirements for optimal decision adequate and balanced information among market players is needed to make optimal decisions for sellers and consumers  Asymmetric Information Types of Asymmetric Information Adverse selection Moral hazard Agency problem sellers do not fully Extreme behavior pursuing the disclose the of market players interest of the features of because part of agent rather products and the cost of their than the services they sell actions is interest of the in the market shouldered by principal others example: example : example: professional medical conflicts in malpractice insurance corporate governance  Addressing Market Failures Imperfect Competition Adverse Selection limit pricing full disclosure of taxing monopoly information profit product labelling certification Moral Hazard Agency Problem sharing the cost supervision of insurance strict governance rules Thank you!