Download Market Efficiency and Market Failure

Market Failure
SPHA511, John Ries
Market Failure
• There are situations, known as "market
failure," when private markets fail to
achieve Pareto efficiency, and thus
provide a potential role for the government
to intervene and improve their efficiency.
• What are the four broad categories of
market failures?
Imperfect competition
Definition: "imperfect competition" is rivalry among
firms in situations where there is an insufficient number
of sellers to achieve perfect competition. Specifically, a
firm can influence the price that it charges (it faces a
downward sloping demand curve).
Imperfect competition
What types of industries are characterized
by imperfect competition?
What are the consequences of imperfect
competition?
• price greater than marginal cost
• too little production
• a reallocation of wealth from consumers to
firms, and
• deadweight loss.
Imperfect competition
PM
B
A
G
MC
PC
MR
QM
QC
Q
Public goods
Definition: a "public good" is one whose benefits
are collective or indivisible in nature. Technically
speaking a public good is one which is
(1)"non-rival" (my consumption doesn't affect how
much you can consume).
(2) "non-exclusive" (it is impossible or extremely
costly to prevent anyone from consuming it).
Which is a public good?
•
•
•
•
•
•
City bus
Lighthouse
Police
Parks
Highways
Art paintings
Why are efficient levels of public goods not
provided by private markets?
Externalities
Externalities are costs or benefits imposed on
third parties (without the effects being “priced”)
What are examples of negative externalities?
What are examples of positive externalities?
Social costs of negative
externalities
Ssocial
Spriv
$
externality
L
Demand
Q*
Q
Social costs of positive externalities
$
S
L
externality
MBsocial
D=MBpriv
Q
Q*
Quantity
Imperfect information
If consumer’s demand (willingness to pay) is “faulty” due
to imperfect information (lack of knowledge of product
attributes or deceptive marketing practices) then “true”
willingness to pay may deviate from realized willingness
to pay. In this case, demand is “wrong” and the
competitive market fails to achieve allocational efficiency.
Imperfect information can lead to problems of
- Adverse selection (hidden type)
- Moral hazard (hidden action)
Imperfect Information
The market for lemons:
What will a consumer be willing to pay if she cannot
judge used car quality and the price of a “good” used car
is P and a “lemon” is X? What will this do to the market
for good used cars?
What are remedies to the imperfect information
problem that do not involve government action?
Health care and market failure
• The health care industry violates conditions necessary for
perfect competition
– Imperfect information:
Health care service providers have specialized knowledge
that can potential be used to exploit consumers.
Consumers face risk of major illness and associated high
costs.
– Externalities:
There are external benefits to an individual maintaining
good health (especially when health care is publicly
funded)
– Imperfect competition:
Insurers, doctors, and hospitals all have power to influence
prices
Remedies to imperfect
information problems
• Labeling
• Standards (set and enforced by
government, business, or professional
organizations)
– When are standards preferred to labeling?
– Both interventions create administration costs
Standards
Standards serve two distinct purposes: public safety
and coordination. When we buy a toaster, we need to
be sure it conforms to safety standards and will not
explode when it’s used. We also need to establish
standards that coordinate activities. The metric
standards allow us to communicate size. We adopt the
standard that “green” means “go.” Firms standardize
product dimensions and specifications (fax paper size,
voltage, etc.) so that products are compatible with each
other.
Different Keyboard Standards
QWERTY
France’s
AZERTY
What share of the world drives on the left?
1/3 of the world’s population drives on the left!
(so their cars should have steering wheels on the right)
Standard changes are rare, but there are strong pressures
to conform to practices of neighboring countries.
BC (1922), New Brunswick (1922),
Nova Scotia (1923), PEI (1924), and
Newfoundland (1947) switched.
Sweden switched twice!
(in 1736 to the left and
1967 back to the right)
“Metrication” everywhere (except US, Liberia, and Burma)
How Drugs are Regulated in Canada
Sara
1. What happened to Vanessa Young?
2. What evidence suggests that Health Canada was too slow
to issue a warning about the drug?
3. What are drugs?
4. How are drugs approved? What are clinical trials and who
performs them?
5. What problems exist in Health Canada’s monitoring of
new drugs? How might they be remedied?
Graduated drug licensing proposed
Julie
• What is the “fundamental shift” in prescription
medicines regulation proposed by Health
Canada?
• What events motivated this proposed reform?
• What stakeholders prefer speedy approval of
new drugs?
• How will the proposal be implemented? Who will
pay?
• What are possible obstacles to the
implementation?
“Drug Approval is Not a Shield
from Lawsuits, Justices Rule”
• Who made the ruling? What was the vote? What
was the award?
• What happened to Diana Levine?
• What were Wyeth’s arguments?
• Why should Wyeth have known of the danger?
• Why did the Court rule against Wyeth?
Leila
“Nurses not reporting faulty devices to Ottawa”
Victoria
• What is the difference in reporting requirements
concerning faulty medical devices for manufacturers and
distributors versus doctors and nurses?
• How frequently do nurses encounter malfunctioning
equipment? What percent know that they should report it
to Health Canada?
• How many reports were sent to Health Canada in 300304? How many products were recalled?
• How many patients die in Canada because of
preventable medical errors?
– What are the causes of preventable medical errors? (not in
article)
The cost of regulation
Winnie
• How much did the cost of regulation increase for
government from 1973/1974 to 1997/1998?
• How do compliance costs compare to costs of
government administration of regulations?
• How are compliance costs estimated?
• If it is businesses that must comply with regulatory
standards, why does the article say that households bear
substantial costs?
• How do compliance costs of households compare to
other household expenditures?
Canada mulls joint drug review with US regulator
• What is the proposal and its objectives?
• What are potential benefits and costs? Why is
the experience of the morning after pill relevant?
• Who will benefit?
• What is the different times for drugs to be
approved in Canada and the US? What is the
reason for these differences?
Steven