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REM 363/ENV 399 - Week 5 LIMITS TO MARKETS. Production Possibility Curve for the Whole Economy Consumer goods & services Ecosystem goods & services D.

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Presentation on theme: "REM 363/ENV 399 - Week 5 LIMITS TO MARKETS. Production Possibility Curve for the Whole Economy Consumer goods & services Ecosystem goods & services D."— Presentation transcript:

1 REM 363/ENV Week 5 LIMITS TO MARKETS

2 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.

3 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

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 dont work properly Market failure consists of: – Monopoly – Externalities – Lack of Property Rights – Public Goods – Imperfect Information

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

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

8 Market Failure This occurs when markets fail to achieve allocative efficiency, i.e. they dont work properly Market failure consists of: – Monopoly – Externalities – Lack of Property Rights – Public Goods – Imperfect Information

9 Negative Externality P Q Ps Pm QsQm Externality Sm Ss D

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11 Market Failure This occurs when markets fail to achieve allocative efficiency, i.e. they dont work properly Market failure consists of: – Monopoly – Externalities – Lack of Property Rights – Public Goods – Imperfect Information

12 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 No property 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

13 Common Pool Resource and Open Access $ per unit Output MC = S AC = S oa Q pc Q oa Demand p p oa profits

14 Types of Goods & Services as Characterized by Rivalry and Exclusivity ExclusivityNon-Exclusivity Rivalryprivate good e.g. loaf of bread common pool resource e.g. air or water Non-Rivalrytoll good e.g. information, bridge or public pool public good e.g. lighthouse, litter cleanup or nice view

15 Market Demand CurveIndividual B Demand Curve Individual A Demand Curve PPP QQ QAQA QBQB QTQT Note: Individuals Demand Curve equals Individuals willingness to pay Market Price Public Goods: Recall the Market Demand Curve in a Competitive Industry.. Consumer Surplus

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

17 EXAMPLE - Individual/Aggregate Demand for Lowering Lake Pollution Level of contaminant (ppm) Marginal Willingness to Pay ($ per year)Total Marginal cost of cleanup Homeowner A Homeowner B Homeowner C

18 Homeowner A Homeowner B Homeowner C MC D


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