Health Sciences 3840B Lecture Notes - Lecture 4: Tim Hortons, Oligopoly, Pareto Efficiency
30 May 2018
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Department
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Professor
FWT –allocatively efficient market will happen
First equation –everybody has equal weight
Not welfare but kind of like welfare –different weights, treating individuals differently, putting diff weights on their well-being or happiness
FWT: free market competitive equilibrium is not maximizing welfare but “weighted welfare”
SWT: we can choose the weights using transfers
As long as the info is symmetric –buyer and seller are equally well-informed –not going to cause a problem in the market
Dentist example problem: dentist had that info, they know how useful the services are to you, but you don’t know that
A small number of big producers
Why does it stay that way, why do we get stuck with monopolies?
New entrants start small, produce less and have large costs –can’t compete with monopolies
Nobody can enter the market
There are fixed costs to a hospital –admin, operating –might just make sense to have one hospital vs. a bunch of small hospitals that need to pay these large fixed
costs
Barriers to natural entry
Person that owns a used dealership might know something about that car that isn’t in some standard specs (info from first owner), and they might not tell you that.
Same standards at the new and the used –is there any info that somebody selling a used car might know and what are their motivations for sharing that info or not?
At the new dealership in principle you can have access to the same information.
Asymmetric information
3. Given quality of the car the price might be a little bit higher than what you would pay, because you are concerned that the car has more problems that you haven’t
been told about
Hard to sell a used car that isn’t actually lower quality – customer doesn’t quite trust, so hard to sell
If you own a used car it’ll be hard to sell it to a used dealership because they’ll also think that it’s lower quality – they won’t believe you
If nobody believes in good quality cars, then there won’t be any
This exercise is just an example of asymmetric information
4. Repeat customers –incentive to give you accurate information, so that other people you know go there
If you’re never gonna see them again – paid by commission they might have some incentive to hide some information so they can sell the car
Physician incentive to suggest stuff not in best interest of patient –might be a bunch of different drugs that are similar, pharmaceutical reps pressuring them and
making other deals with them, depends on how they are paid –if it’s an additional service then you might want to sell
Threat of being sued is a cost imposed if you provide asymmetric information
We shouldn’t assume that everybody with a financial incentive will provide asymmetric information – people have ethics and people do the right thing too!
Supplier-induced demand
We usually think about supply and demand as independent of each other
Here, people that are supplying are creating demand, convincing consumers that they should choose the purchase
Charging a polluter anything even if it’snot the true cost, will make them pollute less
Might not reduce pollution completely because its not possible, but they’ll reduce to the efficient level
Internalize it by thinking about it –suppose you consider the cost you impose on others, even if you still come to class you’re making an efficient choice by considering
it
Missing market –some good that there can’t be a market for
Ex. Factory polluting –at some point there was no market for that but now there is
No market or price when you’re going out and being sick
If you can fine people for smoking, there’s a market for that
When there isn’t a market, there is a missing market, but there could be a benefit to having a market
Negative externalities of production: Q^E > Q^* (quantity is too high, equilibrium is higher than what is socially optimal)
If you could put an additional charge/tax for extra cost (like pollution), then firms would be making decisions along true MC curve, then equilibrium quantity would be
the optimal quantity
Positive externalities of consumption: Q^E < Q* (quantity is “too low”)
Think through exercises: What if there were negative externalities of consumption? What if there were positive externalities of consumption and negative
externalities of production?
Should be able to figure out where the curve should be, where the equilibrium and optimal quantity is
False –no, the dentist does not have more information than you do
True –in a competitive market the equilibrium cost is the marginal cost of production ***False because there’s only one place to buy binders on campus
True –people who don’t smoke are harmed by those who do and are not compensated. Cigarette taxes will reduce smoking, and thus people will internalize the cost
of smoking in public ***With a tax, the demand curve for cigarettes shifts downward (fixed cost maybe?), and the equilibrium quantity is less than without the tax.
False –more producers means competitive market works, no one Tim Hortons has market power and can set prices ***If one raised their prices you could just go to
another one
False –if supply = demand, the competitive market is allocatively efficient and Pareto efficient but welfare is not necessarily maximized ***This does not hold if there
are externalities
Lec 4 Market Failure
May 6, 2018
3:34 PM
Health Economics Page 1
Document Summary
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