1. Microeconomics I Undergraduate Programs Fernando Branco 2006-2007 Second Semester Session 14

2. Microeconomics IUndergraduate Programs 2006-2007 Second Semester Session 14©Fernando Branco Public policy: Rationale and limits Objectives of public policy: –Improve equity and efficiency of allocations. –Obvious cases are market failures. How to achieve the objectives? –Undertsand the limits of public policy.

3. Microeconomics IUndergraduate Programs 2006-2007 Second Semester Session 14©Fernando Branco Market failures Market power Externalities Public goods Information asymmetries

4. Microeconomics IUndergraduate Programs 2006-2007 Second Semester Session 14©Fernando Branco Suppliers with market power provide inefficient output levels: –Underprovision; –Price exceeds Marginal cost –Deadweight loss Money value of loss in welfare PMPM QMQM Deadweight Loss MC MR D P Q Market power

5. Microeconomics IUndergraduate Programs 2006-2007 Second Semester Session 14©Fernando Branco Market power Welfare is reduced: –Loss to the consumers.  Public policies: –Price regulation; –Competition policy: Cartels and price fixing; Mergers and acquisitions.

6. Microeconomics IUndergraduate Programs 2006-2007 Second Semester Session 14©Fernando Branco MR D PMPM QMQM MC P Q Demand Price regulation

7. Microeconomics IUndergraduate Programs 2006-2007 Second Semester Session 14©Fernando Branco Competition policy Fights anti-competitive measures in the market. Forbids certain practices. Restricts some market structures. Targets of competition policy: –Monopolization policies; –Anti-competitive conducts by firms; –Analysis of mergers and acquisitions.

8. Microeconomics IUndergraduate Programs 2006-2007 Second Semester Session 14©Fernando Branco Fines to cartels in EUM&A in the World Relevance of Competition policy

9. Microeconomics IUndergraduate Programs 2006-2007 Second Semester Session 14©Fernando Branco Costs or benefits over agents that are not taken into consideration by the decision maker. Impact of externalities in the market. Negative and positive externalities: –Pollution vs. Education. Regulating externalities: –Taxation; –Market creation. Externalities

10. Microeconomics IUndergraduate Programs 2006-2007 Second Semester Session 14©Fernando Branco QQ P Q MC P0P0 MSC MEC Q* Effect of external costs in production Externalities in production

11. Microeconomics IUndergraduate Programs 2006-2007 Second Semester Session 14©Fernando Branco Goods with special properties on its consumption: –Non-rivalry: consumption by one agent does not prevent consumtion by others. Examples: Radio signals; National defense. –Non-exclusivity: Once the good is provided, no one can be excluded from its consumption. Examples: Mosquito control; Waste management. “Free Rider” Problem –People have no incentive to contribute to the provision of a public goods: “others pay, I also get it.” Public goods

12. Microeconomics IUndergraduate Programs 2006-2007 Second Semester Session 14©Fernando Branco Participants in a market do not all share the same information about prices, quality, techcnology or risks. Outcomes are usually inefficient. Public authorities may which to provide information. Examples of public policies: –Certification; –Forbid certain kinds of advertising; –Contract enforcement. Information Asymmetries

13. Microeconomics IUndergraduate Programs 2006-2007 Second Semester Session 14©Fernando Branco Market power, externalities, the provision of public goods and asymmetric information provide a potential role for regulation and public policy. However, in its intervention the public authorities should also understand the limits imposed by their information asymmetries! Conclusions