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COBWEB MODEL Ao CHEMICALS (millions of pounds/year) Price SUPPOSE PRICE IS ABOVE EQUILIBRIUM PRICE. QUANTITY SUPPLIED IS GREATER THAN QUANTITY DEMANDED.

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Presentation on theme: "COBWEB MODEL Ao CHEMICALS (millions of pounds/year) Price SUPPOSE PRICE IS ABOVE EQUILIBRIUM PRICE. QUANTITY SUPPLIED IS GREATER THAN QUANTITY DEMANDED."— Presentation transcript:

1 COBWEB MODEL Ao CHEMICALS (millions of pounds/year) Price SUPPOSE PRICE IS ABOVE EQUILIBRIUM PRICE. QUANTITY SUPPLIED IS GREATER THAN QUANTITY DEMANDED. x

2 COBWEB MODEL Ao A1 CHEMICALS (millions of pounds/year) Price A price above equilibrium causes the producers to provide a higher quantity supplied than what is demanded.

3 COBWEB MODEL Ao A1 A2 CHEMICALS (millions of pounds/year) Price Such a high quantity supplied means that prices fall, as indicated by the demand curve

4 COBWEB MODEL Ao A1 A2 A3 CHEMICALS (millions of pounds/year) Price Such a low price means that Chemical firms cut back production.

5 COBWEB MODEL Ao A1 A2 A3 Bo CHEMICALS (millions of pounds/year) Price Such little supply means that the price rises to the amount indicated on the demand curve

6 COBWEB MODEL Ao A1 A2 A3 Bo CHEMICALS (millions of pounds/year) Price With such a high price, the quantity supplied rises. B1

7 COBWEB MODEL Ao A1 A2 A3 Bo B1 B2 CHEMICALS (millions of pounds/year) Price With so much supply, price falls

8 COBWEB MODEL Ao A1 A2 A3 Bo B1 B2B3 CHEMICALS (millions of pounds/year) Price Such a low price provides no incentive to produce any product at all.

9 WHAT PREVENTS THE UNSTABLE CYCLE? - MORE INELASTIC SUPPLY - A LONG TIME HORIZON - INSTANTANTANEOUS FEEDBACK ABOUT PRICES - IMMEDIATE ADJUSTMENT OF PRODUCTION - COUNTERCYCLICAL INVENTORY POLICY (requiring storable goods) - EXTRA CAPACITY - MARKET POWER - COMMUNICATION, PLANNING OF MEMBERS IN MARKET. INFORMATION ON MARKET - MARKETS THAT ALLOW SPECULATION AGAINST UNSTABLE BEHAVIOR

10 COBWEB MODEL Ao A1 A2 A3 Bo B1 B2B3 CHEMICALS (millions of pounds/year) Price

11 Quintiles Based on Per Capita Income

12 Cumulative % of: Coun- GNP tries WORLD INCOME DISTRIBUTION

13 LINE OF EQUALITY USA WORLD

14 MEASUREMENT OF BENEFIT Supply WITHOUT CFC Regulation Supply WITH CFC Regulation Demand Price of Fish Fish (tons per year) INCREMENTAL BENEFIT OF CURBING POLLUTION

15 Social Costs and Benefits * Base used for comparison for computring benefits and costs of phasing out CFCs ** Hypotehtical

16 SOCIAL COSTS AND BENEFITS Incremental Social Benefit Incremental Social Cost

17 IMPACT OF THE DISCOUNT RATE

18 COSTS OF DECISIONS External Costs of Excluding People from Decision Minimum Cost Internal Costs of Gaining Decision Total of Internal & External Costs Dictatorship (0%) Majority (50%) Unanimity (100%) PERCENT OF PEOPLE REQUIRED FOR DECISION $ OF COST

19 GOVERNMENT STUDIES

20 MARKET GOVERNMENT GOVERNMENT FAILURE INTERVENTION FAILURE EXTERNALITY PUBLIC ENTERPRISE -PUBLIC GOODS-NATIONALIZATION MARKET -PRIVATIZATION POWER REGULATION INEQUITIES - OUTPUT DYNAMIC - PRICE MKT. FAIL. - STANDARDS INDIVISIBILITY ANTITRUST INFORMATION -STRUCTURE ASYMMETRY -CONDUCT TAXES (SUBSIDIES) PROVISION OF INFORMATION RATIONING (MONEY)

21 MARKET GOVERNMENT GOVERNMENT FAILURE INTERVENTION FAILURE EXTERNALITY PUBLIC ENTERPRISE ADMINISTRATIVE -PUBLIC GOODS-NATIONALIZATION COST MARKET -PRIVATIZATION COMPLIANCE POWER REGULATION COST INEQUITIES - OUTPUT EFFICIENCY COST DYNAMIC - PRICE - NEGATIVE EXTER. MKT. FAIL. - STANDARDS -PUBLIC BADS INDIVISIBILITY ANTITRUST - MKT POWER INFORMATION -STRUCTURE - INEQUITIES ASYMMETRY -CONDUCT - DYNAMIC TAXES (SUBSIDIES) - INDIVISIBILITY PROVISION OF - INFORMATION INFORMATION RATIONING (MONEY)

22 Types of Control Government Failures that lead by Governing Bodies to Stronger Government No Central Control Tyranny (Dictatorship) by the Strongest Confederation Indecisiveness: Extortion by the Weakest Central Control Dictatorship by the strongest

23 Examples of World Governing Bodies & Treaties United Nations (Security Council) World Trade Organization (precursor: GATT) World Bank & IMF Montreal Guidelines (CFCs) SALT Regional Groups: NAFTA, EEC (& Euro), NATO Geneva Conventions & the Hague Land Mine Convention Extradition Treaties Law of the Sea Law of Antarctica Law of Space


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