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Headlines Part III
Economics 230
J. F. O’Connor
Part II Recap
• Concerned with the workings of a perfectly
competitive market economy with private
ownership.
• Demonstrated that equilibrium in such an
economy is socially efficient in the sense
that some could not be made better off
without making someone worse off,
provided certain conditions are met.
Conditions for Social Efficiency
• No individual agent, consumer or producer,
has market power
• Information about prices and technology is
generally available - no asymmetries of
information
• No externalities in consumption or
production
Social Efficiency (contd.)
• All goods are private - no public goods, no
commons goods, and no collective goods
• Property rights are clearly specified
Market Failure
• Violation of one or more of the above
conditions can prevent the equilibrium of a
market economy from being socially
efficient. We refer to this as market failure
• Note that a socially efficient outcome is not
necessarily fair or just
Content of Part III
1 Concerned with how an economy operates
when one or more of the conditions for
social efficiency are not met and what
action, if any, society might take to deal
with the result.
2 Labor Markets
3 Income Distribution
Market Power - Imperfect
Competition
• Monopoly, Monopolistic Competition
(Mon. Comp), and Oligopoly
• Main problem is that price exceeds marginal
cost
• Monopoly can be and is often regulated
• Mon. Comp. provides variety
• Oligopoly - prevent collusion and
encourage them to compete
Information
• The role of information - why professionals
such as lawyers, physicians, real estate
brokers, middlemen
• Optimal amount of information
• Asymmetric information and market failure
Externalities
• Positive and negative each causes market
failure
• Positive - market produces too little,
• Negative - market produces too much
• Pigou - tax negative and subsidize positive
• Coase - market solution under some
conditions
Non-private Goods
• Public goods - nonrival and nonexcludable market produces too little
• Commons goods - rival and nonexcludable market uses too much
• Collective goods - nonrival and excludable market leads to natural monopoly
Labor Markets
• Competitive labor market - equilibrium
wages and employment
• Explaining differences in earnings:
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Human capital
labor unions
winner-take-all markets
compensating wage differentials
discrimination
Income Redistribution
• All modern industrial societies modify both
the initial endowments and the outcome of
the market system. They redistribute
income. Why?
• Moral and practical aspects of income
inequality
• Methods of income redistribution