Economic Notes for Government Policies(Price fixation and stuff)

[icyblind]

Thanks alot

[Freaked12]

Thanks alot

Anytime.

[Freaked12]

CAUSES OF MARKET FAILURE                             
-----------------------------
According to mainstream economic analysis, a market failure (relative to Pareto efficiency) can occur for three main reasons.

First, agents in a market can gain market power, allowing them to block other mutually beneficial gains from trades from occurring. This can lead to inefficiency due to imperfect competition, which can take many different forms, such as monopolies, monopsonies, cartels, or monopolistic competition, if the agent does not implement perfect price discrimination. In a monopoly, the market equilibrium will no longer be Pareto optimal. The monopoly will use its market power to restrict output below the quantity at which the Marginal social benefit (MSB) is equal to the Marginal social cost (MSC) of the last unit produced, so as to keep prices and profits high.An issue for this analysis is whether a situation of market power or monopoly is likely to persist if unaddressed by policy, or whether competitive or technological change will undermine it over time.
Second, the actions of agents can have externalities, which are innate to the methods of production, or other conditions important to the market. For example, when a firm is producing steel, it absorbs labor, capital and other inputs, it must pay for these in the appropriate markets, and these costs will be reflected in the market price for steel. If the firm also pollutes the atmosphere when it makes steel, however, and if it is not forced to pay for the use of this resource, then this cost will be borne not by the firm but by society. Hence, the market price for steel will fail to incorporate the full opportunity cost to society of producing.In this case, the market equilibrium in the steel industry will not be optimal. More steel will be produced than would occur were the firm to have to pay for all of its costs of production.Consequently, the MSC of the last unit produced will exceed its MSB.
Finally, some markets can fail due to the nature of certain goods, or the nature of their exchange. For instance, goods can display the attributes of public goods or common-pool resources, while markets may have significant transaction costs, agency problems, or informational asymmetry. In general, all of these situations can produce inefficiency, and a resulting market failure. A related issue can be the inability of a seller to exclude non-buyers from using a product anyway, as in the development of inventions that may spread freely once revealed. This can cause underinvestment, such as where a researcher cannot capture enough of the benefits from success to make the research effort worthwhile. 

[***exam***]

wowi !!!! Thanks again !!!!!!! 

[***exam***]

help again plz

Why does balance of Payments have to Balance ?   a small explanation wolud also be fine

[Freaked12]

help again plz

Why does balance of Payments have to Balance ?   a small explanation wolud also be fine

Macro economic instabilty.

A deficit in the balance of payments has these effects

an excess of imports over exports, a dependence on foreign investors, and an overvalued currency. Countries experiencing a payments deficit must make up the difference by exporting gold or Hard Currency reserves, such as the U.S. Dollar, that are accepted currencies for settlement of
international debts.
Since more is imported and less is exported. The real national income will fall which would have ripple effects and damage the economy. There could also be a rise in inflation.

Foreign exchange reserves will be depleted which will hurt the stability and reserve funds.

[Freaked12]

This explaination of J - curve theory could prove important in your explaination of trade deficit

In economics, the 'J curve' refers to the trend of a country’s trade balance following a devaluation or depreciation. A higher exchange rate initially means imports are more expensive, or equivalently exports sell for less foreign currency, making the current account worse (a bigger deficit or smaller surplus). After a while, though, the volume of exports will start to rise because of their lower more competitive prices to foreign buyers, and domestic consumers will buy fewer of the costlier imports. Eventually, the trade balance should improve on what it was before the devaluation. If there is a currency revaluation or appreciation there may be an inverted J-curve.

Following the depreciation or devaluation of the currency, the volume of imports and exports will remain level due in part to pre-existing contracts for imported goods that have to be honoured. However, the depreciation will cause the price of imports to rise and the price of exports to fall. Therefore, total spending on imports will subsequently increase and total spending on exports will decrease. It is this that causes the worsening of the current account.

Moreover, in the short run, demand for the more expensive imports remain price inelastic. This is due to time lags in the consumer's search for acceptable, cheaper alternatives. As a result, the quantity demanded for imports remain the same, although consumers are now paying a higher price for it. Ceteris paribus, a worsening of the current account, and hence the balance of payments, is to be expected in the short run.

Over the longer term a depreciation in the exchange rate can have the desired effect of improving the current account balance. Demand for exports picks up and domestic consumers will switch their expenditure to domestic products and away from expensive imported goods and services. Equally, many foreign consumers may switch to purchasing cheaper imported products instead of their own domestically produced goods and services.

Empirical investigations of the J-curve have sometimes focused on the effect of exchange rate changes on the trade ratio, i.e. exports divided by imports, rather than the trade balance, exports minus imports. Unlike the trade balance, the trade ratio can be logged regardless of whether a trade deficit or trade surplus exists

[***exam***]

Thanks helped me loads !!! 

[pastyear]

CAUSES OF MARKET FAILURE                             
-----------------------------
According to mainstream economic analysis, a market failure (relative to Pareto efficiency) can occur for three main reasons.

First, agents in a market can gain market power, allowing them to block other mutually beneficial gains from trades from occurring. This can lead to inefficiency due to imperfect competition, which can take many different forms, such as monopolies, monopsonies, cartels, or monopolistic competition, if the agent does not implement perfect price discrimination. In a monopoly, the market equilibrium will no longer be Pareto optimal. The monopoly will use its market power to restrict output below the quantity at which the Marginal social benefit (MSB) is equal to the Marginal social cost (MSC) of the last unit produced, so as to keep prices and profits high.An issue for this analysis is whether a situation of market power or monopoly is likely to persist if unaddressed by policy, or whether competitive or technological change will undermine it over time.
Second, the actions of agents can have externalities, which are innate to the methods of production, or other conditions important to the market. For example, when a firm is producing steel, it absorbs labor, capital and other inputs, it must pay for these in the appropriate markets, and these costs will be reflected in the market price for steel. If the firm also pollutes the atmosphere when it makes steel, however, and if it is not forced to pay for the use of this resource, then this cost will be borne not by the firm but by society. Hence, the market price for steel will fail to incorporate the full opportunity cost to society of producing.In this case, the market equilibrium in the steel industry will not be optimal. More steel will be produced than would occur were the firm to have to pay for all of its costs of production.Consequently, the MSC of the last unit produced will exceed its MSB.
Finally, some markets can fail due to the nature of certain goods, or the nature of their exchange. For instance, goods can display the attributes of public goods or common-pool resources, while markets may have significant transaction costs, agency problems, or informational asymmetry. In general, all of these situations can produce inefficiency, and a resulting market failure. A related issue can be the inability of a seller to exclude non-buyers from using a product anyway, as in the development of inventions that may spread freely once revealed. This can cause underinvestment, such as where a researcher cannot capture enough of the benefits from success to make the research effort worthwhile. 

Is this in the syllabus?
How about if i explain the positive and negative externalities with diagram in this question.

[Freaked12]

Is this in the syllabus?
How about if i explain the positive and negative externalities with diagram in this question.

this is one of the factors that causes market failure,you also have to write about monopolies and failure to provide certain type of goods.

[***exam***]

hey hey hey
does any 1 have ECONOMICS standard data booklet !!!

[***exam***]

here 4 bs

[pastyear]

 If the firm also pollutes the atmosphere when it makes steel, however, and if it is not forced to pay for the use of this resource, then this cost will be borne not by the firm but by society. Hence, the market price for steel will fail to incorporate the full opportunity cost to society of producing.In this case, the market equilibrium in the steel industry will not be optimal. More steel will be produced than would occur were the firm to have to pay for all of its costs of production.


In the above statement, i have few doubts.

1) Why "market price for steel will fail "?

2) What do you mean by "incorporate the full opportunity cost to society of producing"?

3) Since price drop as you said why the firm will want to produce more?



Thanks and pls explain.

[Freaked12]

Is this in the syllabus?
How about if i explain the positive and negative externalities with diagram in this question.

Market price will fail not for the firm but because of the society as firm's market price does not include externalities.
2)Same as above market price should be that price which takes Positive externalities and negative externalities into account.
3)Read again it means that the production of the firm will be much lower if it were to take externalities into account

[pastyear]

Is the market price is the price charge to the consumers?

If positive and negative externalities included , market price should be high but firm's price will relatively low as firm isnt consider +ve and -ve   externalities. Is this right?