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REM 363/ENV 399 - Week 5 LIMITS TO MARKETS

REM 363/ENV 399 - Week 5 LIMITS TO MARKETS. Production Possibility Curve for the Whole Economy. From D, more consumer goods could be produced without sacrificing ecosystem goods & services and vice versa. A. B. Consumer goods & services. D. C. Ecosystem goods & services.

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REM 363/ENV 399 - Week 5 LIMITS TO MARKETS

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  1. REM 363/ENV 399 - Week 5 LIMITS TO MARKETS

  2. Production Possibility Curve for the Whole Economy From D, more consumer goods could be produced without sacrificing ecosystem goods & services and vice versa. A B Consumer goods & services D C Ecosystem goods & services

  3. The Production Possibility Curve and the Social Welfare Function Each isoquant reflects a fixed level of social welfare and this increases from I1 to I2 to I3 A Consumer goods & services B Isoquant 3 D Isoquant 2 C Isoquant 1 Ecosystem goods & services

  4. Requirements for Proper Functioning Market (i.e. Perfect Competition) 1. Large number of buyers and sellers (ie. price takers) 2. Perfect information about current and future prices, products available, etc. 3. All economic agents behave rationally; producers maximize profits and consumers maximize their satisfaction or "utility" 4. Market prices reflect full costs of production and consumption 5. Inputs being supplied and goods being produced are individually owned and divisible; thus, property rights exist

  5. Market Failure • This occurs when markets fail to achieve allocative efficiency, i.e. they don’t work properly • Market failure consists of: • Monopoly • Externalities • Lack of Property Rights • Public Goods • Imperfect Information

  6. Market Structure & Market Power Price Takers Price Makers Competitive Markets Monopoly Oligopoly

  7. Monopoly and inefficiency P S Pm P* D Marginal Revenue Qm Q* Q

  8. Market Failure • This occurs when markets fail to achieve allocative efficiency, i.e. they don’t work properly • Market failure consists of: • Monopoly • Externalities • Lack of Property Rights • Public Goods • Imperfect Information

  9. Negative Externality Ss P Sm Ps Pm Externality D Qs Qm Q

  10. Market Failure • This occurs when markets fail to achieve allocative efficiency, i.e. they don’t work properly • Market failure consists of: • Monopoly • Externalities • Lack of Property Rights • Public Goods • Imperfect Information

  11. Source: Bromley, 1989a

  12. Common Pool Resource and Open Access $ per unit MC = S AC = Soa p poa profits Demand Qpc Qoa Output

  13. Types of Goods & Services as Characterized by Rivalry and Exclusivity

  14. Public Goods: Recall the Market Demand Curve in a Competitive Industry .. Individual A Demand Curve Individual B Demand Curve Market Demand Curve P P P Consumer Surplus Market Price QA Q QB Q QT Note: Individual’s Demand Curve equals Individual’s “willingness to pay”

  15. Public Good and Marginal Willingness to Pay P Market - MWTP Same distance B - MWTP A - MWTP Q

  16. EXAMPLE - Individual/Aggregate Demand for Lowering Lake Pollution

  17. 125 100 75 50 25 125 100 75 50 25 Homeowner A Homeowner C 4 3 2 1 0 4 3 2 1 0 250 200 150 100 50 125 100 75 50 25 MC Homeowner B D 4 3 2 1 0 4 3 2 1 0

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