REM 363/ENV 399 - Week 5 LIMITS TO MARKETS

Production Possibility Curve for the Whole Economy

Consumer goods & services

Ecosystem goods & services

D

A

B

C

From D, more consumer goods could be produced without sacrificing ecosystem goods & services and vice versa.

The Production Possibility Curve and the Social Welfare Function

A

B

C

D Isoquant 3

Consumer goods & services

Ecosystem goods & services

Isoquant 2

Isoquant 1

Each isoquant reflects a fixed level of social welfare and this increases from I1 to I2 to I3

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

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

Market Structure & Market Power

Price Makers Price Takers

Monopoly Oligopoly Competitive Markets

Monopoly and inefficiency

P

QQm Q*

Marginal Revenue

S

D

P*

Pm

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

Negative Externality

P

Q

Ps

Pm

Qs Qm

Externality

Sm

Ss

D

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

Four types of property regimes

State property

Individuals have duty to observe use/access rules determined by controlling/ managing agency. Agencies have right to determine use/access rules.

Private property

Individuals have right to undertake socially acceptable uses, and have duty to refrain from socially unacceptable uses. Others (called “non-owners”) have duty to refrain from preventing socially acceptable uses, and have a right to expect that only socially acceptable uses will occur.

Common property

The management group (the “owners”) has right to exclude nonmembers, and nonmembers have duty to abide by exclusion. Individual members of the management group (the “co-owners”) have both rights and duties with respect to use rates and maintenance of the thing owned

Noproperty rights

No defined group of users or “owners” and benefit stream is available to anyone. Individuals have both privilege and no right with respect to use rates and maintenance of the asset. The asset is an “open access resource”

Source: Bromley, 1989a

Common Pool Resource and Open Access $

per u

nit

Output

MC = S

AC = Soa

Qpc Qoa

Demand

p

poaprofits

Types of Goods & Services as Characterized by Rivalry and Exclusivity

Exclusivity Non-Exclusivity

Rivalry private good

e.g. loaf of bread

common pool resourcee.g. air or water

Non-Rivalry ‘toll’ good e.g. information, bridge or public pool

public good

e.g. lighthouse, litter cleanup or nice view

Market Demand CurveIndividual B Demand Curve

Individual A Demand Curve

P P P

QQQAQB QT

Note: Individual’s Demand Curve equals Individual’s “willingness to pay”

Market Price

Public Goods: Recall the Market Demand Curve in a Competitive Industry ..

Consumer Surplus

Public Good and Marginal Willingness to Pay

P

Q

A - MWTP

B - MWTP

Market - MWTP

Samedistance

EXAMPLE - Individual/Aggregate Demand for Lowering Lake Pollution

Level of contaminant

(ppm)

Marginal Willingness to Pay ($ per year) Total

Marginal cost of

cleanupHomeowner A

Homeowner B

Homeowner C

4 110 60 30 200 503 85 35 20 140 652 70 10 15 95 951 55 0 10 65 1500 45 0 5 50 240

125100755025

4 3 2 1 0

125100755025

4 3 2 1 0

125100755025

4 3 2 1 0

Homeowner A

Homeowner B

Homeowner C

250200150100

50

4 3 2 1 0

MC

D