140901M this section summary reviewed and sequence reposted Summarized from Greg Mankiw’s Principles of Economics PART 3 Markets And Welfare Chapter 7 of 36 – Consumers, Producers, and the Efficiency of Markets … section 14 To conclude free markets are efficient we make assumptions about how markets work. When these assumptions do not hold, the conclusion a market at equilibrium is efficient may not be true. We have assumed markets are perfectly competitive. However, competition is often not perfect • in some markets a single buyer or seller or a small group may be able to influence market prices • this ability to influence prices is called “market power” • market power causes markets to be inefficient because it keeps the price and quantity away from the supply and demand equilibrium We also assumed outcome in a market • only matters to the buyers and sellers in that market • but the decisions of buyers and sellers sometimes affect people who do not participate in the market Pollutants emitted during production of a product • affect not only those who make and use the product • but everyone who breathes air or drinks water that has been polluted These “externalities” cause welfare in a market to depend on more than the buyers’ value and the sellers’ cost. Because buyers and sellers • do not heavily weigh these side effect externalities when deciding how much to consume and produce • the equilibrium in a market can be inefficient from the view of overall society Market power and externalities • are main components of a phenomenon called “market failure” • market failure is the inability of some free markets to efficiently allocate resources for overall society When free markets fail • government regulation can potentially remedy the problem • and increase overall society economic efficiency and welfare (end of chapter 7 of 36)
Posted on: Mon, 01 Sep 2014 10:50:41 +0000
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