10

I have to intervene to say that market failure and externality are not the same thing. So I do not think it is at all correct to define market failure as when "the production or consumption of a good or service causes additional positive or negative externalities on a third party not involved in the economic activity". Externalities are but one example ...


6

While advertising can be zero sum, here are two additional dimensions you might want to consider. Billboards, like other forms of advertising, can inform. In this way Ford can talk about their new 8 seat minivan while GM talks about the more fuel efficient engine of their latest model. This can result in happier customers who value their product better and ...


5

I feel like I do not understand the exact meaning behind the notion of the Pareto optimality. It's not you. There are different senses of the phrase "Pareto Optimal," and you have to figure out from context which one is being used. The dictionary definition of Pareto Optimal is something like "An allocation from which any feasible change which makes any ...


4

An aspect of the matter could be described as follows: We want prompt replacement of (existing) fixed capital because, I guess, it creates currently "unacceptable" levels of negative externalities, and we know better than to think that through the pricing of the externalities we will be able to reverse the damages, and all swell. From this point of ...


4

To answer your other question of what properly defines market failure: The market fails when the socially desirable outcome is not achieved through the market. Since the market decisions are made based on cost-benefit analysis, when social (net) cost/benefit = private (net) cost/benefit then private actors in a market will make the socially optimal decision....


4

Your description of the Efficient Market Hypothesis (EMH) is not correct. The EMH simply states that asset prices fully reflect all publicly-available information. It does not make the wild claim that: the market will find the best solution both in the short and in the long term. You write: It seems that market players are not investing in ensuring ...


4

As far as we can tell, no, there is no way to do it using only a free market. Coase postulated that within a free market, agents would negotiate private contracts to internalise the externalities. In reality, this didn't happen. It turned out that humans aren't perfectly informed hyper-rational beings. And as Coase himself had inferred, the transaction ...


3

If negative externalities are priced into the market via a pigouvian tax, then those responsible for the negative externalities pay. As a whole, the public is better off. Firstly because the market will now move to a more efficient situation, and the amount of negative externality will decrease (assuming something other than perfect inelasticity). And ...


3

There is a vast literature in both economics and marketing on advertising. Some highlights relevant to your specific question: A classic paper (Grossman and Shapiro 1984) looks at competitive advertising and indeed finds that advertisers tend to send too many ads. Intuitively, some customers attracted by an ad aren't new demand, but rather simply stolen ...


3

In general, yes it's an externality: it's a cost borne by others. How do we know it's a cost with real economic value? Because in general, properties with good light and better views tend to attract higher purchase prices and higher market rents. And there's a difference between "view/light might be obscured some time in the future" versus "they are ...


3

My conclusion based on reading his paper is that the utility function of an individual or society can't be of the CRRA form presented in the paper. That would indeed lead to scenarios where you could not get out of the bed in the morning, as minimizing the tiniest probability of an enormous risk would warrant infinite sum of money. I will attempt to explain ...


3

You don't give the source of the quote, but presumably what is meant is this. Whether X's production or consumption of a good affects Y (in a physical way such as smoke from X's factory or noise from X's playing loud music, not merely through the workings of the price system) is a matter of fact. On the other hand, whether X is required (assuming a ...


3

There are two sorts of network effects a network good might have. It might have consumption externalities (such as with traffic) or it might have positive network externalities (such as with operating systems). The latter case is the case that your link discusses. I don't see a discussion of perfect competition in your link, but if you imagine a model in ...


3

Am I missing something? Is there really a sense in which the price $P_S$ in the above graph is the "correct efficient price" across the board, both for producers and consumers? In Econ 101, we will often simply define efficiency as that which maximizes social surplus. So yes, here $P_S$ is efficient. (By the way, in economics, we have no use for the ...


2

A negative externality arises when the private net marginal benefit (i.e. the marginal benefit minus the marginal cost) of an activity exceeds the net social benefit. In such cases, the self-interested private decision maker will increase their participation in the activity even though it is socially inefficient for them to do so. A positive externality ...


2

A possible pair of definitions is this: Definition. A negative externality of a good is any cost suffered by a party other than the buyer or the seller of the good, relative to a situation where the good is not traded at all. Definition. A positive externality of a good is any benefit enjoyed suffered by a party other than the buyer or the seller of the ...


2

Demerit goods are goods where it is agreed by society that consumption is harmful for the consumer yet it is still consumed due to bounded rationality or because you disagree with society while negative consumer externalities occur when actions of a consumer is harmful for society. Goods that are demerit but may not have negative consumer externality: Any ...


2

This should probably be a comment, but it's too long so I am posting it as an answer. I'm not sure I necessarily agree with "[A Pigouvian tax] is a fixed unit price, which cannot be efficient if the damage costs are highly non-linear." But I do definitely agree with the fact that non-linearity causes practical problems for a Pigovian implementation, as I ...


2

The governments want to ensure that there is enough food for their people even if international food trade breaks down (for example due to trade war, war, or famine). A secondary objective is that they want low food prices to make food affordable to people with low/medium income. Politicians that drive up food prices for the masses are less likely to get ...


2

Markets are extremely poor at pricing events that have very low probability and catastrophic impacts. In part because we're very bad at estimating low-probability events: by definition, they're rare. And in part because the catastrophic impacts fall on pretty much all the population, so any single purchase has very widely-spread potential negative ...


2

In the particular case of nuclear power plants, yes, the risk cost can be considered as a negative externality. That's because nuclear power plant operators are explicitly limited by law in their liability for third-party costs in the event of damages to those third parties. The third-party risk they present could run into trillions (\$/€): at Fukushima, ...


2

To make sure it's completely explicit: superscripts below are indices referring to either firm $1$ or firm $2$. The choice variables in this problem are $\mathbf{q}^2$ and $\beta$. Notice that $\mathbf{q}^2$ is a vector of $n$ quantities. That is to say, $\mathbf{q}^2=\left(q_1^2,q_2^2,\ldots,q_n^2\right)$. $(13.9)$ is just the derivative of the objective ...


2

The blue lines are labelled as being costs, not prices. The line labelled "Private Cost" represents quantity supplied for a particular cost to the consumer. The line labelled "Social Cost" represents the quantity supplied for a particular cost to society. While, for the former, the cost is equal to the price received by the supplier, for the latter the cost ...


2

The amount of external cost is determined by the level of production in this framework. If the producers receive a subsidy the MPC shift to the right as you point out. That also means that for each level of cost production increases and therefore the external benefits are less, that is, they are internalizised. If the subsidy is enough the external ...


2

Your understanding is close, but not completely correct. Look at the picture below. Blue is the demand curve, Orange the marginal private costs (which in perfect competition is equal to supply). Should there be no taxation or externality the equilibrium price would be P1 and the equilibrium quantity Q1. If there is a production externality the social costs ...


2

First let's clarify some terminology: I assume that with "common resources" you mean goods that are non-excludable but rivalrous. The term that applies in those cases is open access. In common resources there are shared property rights so some excludability (this is one of the mistakes in Hardin's tragedy of the commons). The answer to your two related ...


1

The payoff of an individual or a group is given by $$\text{thier benefits}-\text{their costs}.$$ Let's work with an example of car ownership. It yields two benefits for me: I can use it to go to work (which is worth $w$) and I can use it to go shopping (which is worth $s$ to me). Owning the car is also costly: fuel and maintainence cost $c$. Thus, the net ...


1

Vertical summation of the individual marginal benefit curves is the correct way to find social marginal benefit if the camera system, so far as the two stores are concerned, is a public good. Horizontal summation is the way to find total market demand for a private good. A good is a public good if it satisfies two conditions. One is non-excludability: that ...


1

I would have thought the social planner might want the value of $x_i$ to be such that $f'(x_i)=k(n-1)$ at which point the marginal gain to each individual offsets the marginal total cost to the others while individual driver $i$ might want the value of $x_i$ to be such that $f'(x_i)=t$ at which point the marginal gain offsets the marginal tax To me that ...


1

This graph shows that the private sector will always be better of as $Q$ increases (but with a decreasing rate). Thus the question is up to which point the increase of $Q$ will not negatively affect the society. Recall also that Pareto improvement is defined to be a change to a different allocation that makes at least one individual better off ...


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