ECON10004 Lecture Notes - Lecture 8: Coase Theorem, Imperfect Competition, Efficient-Market Hypothesis
27 Jul 2018
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Document Summary
Markets fail to acieve the efficient outcome (cs = ps) Implies society"s wellbeing is lower than the efficient level. Sources of market failure a. b. c. d. Market equilibrium is efficient any government intervention will reduce social well-being. Market failure government intervention can increase social well-being. Decision-maker"s action causes costs/benefits to other members of society. These costs/benefits are not received or taken into account by the decision-maker. Person 1 takes an action that affects the wellbeing of person 2. Effect on person 2"s wellbeing is not reflected in the cost/benefit to person 1 of taking that action. Externality may be positive or negative and may derive from production or consumption activities (e. g. ) pollution, smoking, education. Spillover from action by decision-maker to another party. Because decision-maker doesn"t bear costs or receive benefits from the spillover, they don"t take into account the consequences. Causes decision-maker to take either too low or too high an action.
