Owing to lack of student interest this blog is cancelled.
I'll try again next semester in a different format.
Friday, May 9, 2008
Saturday, April 26, 2008
Market failures
I've got a bit lax at posting at this website because the student response has not been very strong. I'll try again in a different format in the future.
The last week we completed an introduction to the topic of 'market failures'.
Free markets generally work well - they deliver efficiency - if competitive conditions obtain and consumers must pay to consume and firms must pay all the costs they impose.
With externalities this last condition is not satisfied. If a firm imposes external costs (e.g. pollution) then it will produce more than what is socially optimal. If external benefits are provided (e.g. science and development work that delivers for free cost reductions to other industries) then a firm will produce too little.
We saw that governments can intervene with tax/subsidy policies to achieve economic efficiency. Alternatively property rights can be defined on the resource giving rise to the externality and bargaining used to achieve efficiency - this solution involving private actions is due to Ronald Coase. Coase showed that efficiency would obtain regardless of how property rights were assigned.
Bargaining does not always yield efficient outcomes as the example of wars and strikes show so it may not be possible to rely on it to resolve externalities.
Then we may need to impose taxes/subsidies or use regulations that limit production or pollution. These regulations may produce inefficiency if we do not know the costs of pollution abatement among firms - we may otherwise force firms with high costs of abatement to do lots of cleanup. The nice thing about regulations however is that pollution levels themselves can be accuratetely specified and pursued.
One way to hit exact pollution targets but to do so in a cost-efficient way is to impose regulations on firms by assigning them pollution quotas and then making these quotas tradeable. Firms with high costs of pollution abatement will buy quotas and those with low costs will sell their quotas and clean up themselves.
Finally we discussed public goods as goods which were non-excludable and non-rival in consumption. These will be underprovided by free markets since free-riders will consume the goods without paying for them. Moreover we wouldn't want to price them anyway since their consumption is non-rival - extra consumers add nothing to cost. Public goods (such as defence) are often provided by government rather than in markets and funded by taxes.
Common property resources are non-excludable but rival. Examples include some ocean fisheries. Individuals account for their own costs in accessing such resources but not the costs they impose - use is rival - on others. Hence use is excessive. Here you do wish to price because of the non-rivalry but currently cannot. A solution might be to try to impose ownership or to regulate the use of such resources.
Finally, we discussed club goods where consumption is excludable but use is non-rival. Here pricing would lead to excessively low use since consumption is non-rival. A solution is to levy a fixede membership fee for accessing the resopurce but then to allow unlimited use at a zero price. An example would be pricing access to a pay-TV service or to something like a golf club.
The last week we completed an introduction to the topic of 'market failures'.
Free markets generally work well - they deliver efficiency - if competitive conditions obtain and consumers must pay to consume and firms must pay all the costs they impose.
With externalities this last condition is not satisfied. If a firm imposes external costs (e.g. pollution) then it will produce more than what is socially optimal. If external benefits are provided (e.g. science and development work that delivers for free cost reductions to other industries) then a firm will produce too little.
We saw that governments can intervene with tax/subsidy policies to achieve economic efficiency. Alternatively property rights can be defined on the resource giving rise to the externality and bargaining used to achieve efficiency - this solution involving private actions is due to Ronald Coase. Coase showed that efficiency would obtain regardless of how property rights were assigned.
Bargaining does not always yield efficient outcomes as the example of wars and strikes show so it may not be possible to rely on it to resolve externalities.
Then we may need to impose taxes/subsidies or use regulations that limit production or pollution. These regulations may produce inefficiency if we do not know the costs of pollution abatement among firms - we may otherwise force firms with high costs of abatement to do lots of cleanup. The nice thing about regulations however is that pollution levels themselves can be accuratetely specified and pursued.
One way to hit exact pollution targets but to do so in a cost-efficient way is to impose regulations on firms by assigning them pollution quotas and then making these quotas tradeable. Firms with high costs of pollution abatement will buy quotas and those with low costs will sell their quotas and clean up themselves.
Finally we discussed public goods as goods which were non-excludable and non-rival in consumption. These will be underprovided by free markets since free-riders will consume the goods without paying for them. Moreover we wouldn't want to price them anyway since their consumption is non-rival - extra consumers add nothing to cost. Public goods (such as defence) are often provided by government rather than in markets and funded by taxes.
Common property resources are non-excludable but rival. Examples include some ocean fisheries. Individuals account for their own costs in accessing such resources but not the costs they impose - use is rival - on others. Hence use is excessive. Here you do wish to price because of the non-rivalry but currently cannot. A solution might be to try to impose ownership or to regulate the use of such resources.
Finally, we discussed club goods where consumption is excludable but use is non-rival. Here pricing would lead to excessively low use since consumption is non-rival. A solution is to levy a fixede membership fee for accessing the resopurce but then to allow unlimited use at a zero price. An example would be pricing access to a pay-TV service or to something like a golf club.
Wednesday, April 9, 2008
Research question; A tax on exports
If you think you are well on top of the trade material presented you might want to consider the following issues.
Suppose a country such as Australia is a net exporter of a product produced by a competitive industry such as maize.
Suppose the government decides to impose an export tax on maize.
Show the following:
1. This tax will reduce the price of maize paid by consumers in Australia and increase their welfare compared to the situation where there is no tax.
2. Farmers growing maize lose as a consequence of the tax.
3. The tax is associated with deadweight losses in the sense that the value of the losses to local producers exceeds the gains to consumers plus the gain in tax revenue to the government.
It is a somewhat surprising set of outcomes until you understand the effects of the tax. Think about it and if you can explain what is going on post your views here!
A related question is set in next week's tutorial.
Suppose a country such as Australia is a net exporter of a product produced by a competitive industry such as maize.
Suppose the government decides to impose an export tax on maize.
Show the following:
1. This tax will reduce the price of maize paid by consumers in Australia and increase their welfare compared to the situation where there is no tax.
2. Farmers growing maize lose as a consequence of the tax.
3. The tax is associated with deadweight losses in the sense that the value of the losses to local producers exceeds the gains to consumers plus the gain in tax revenue to the government.
It is a somewhat surprising set of outcomes until you understand the effects of the tax. Think about it and if you can explain what is going on post your views here!
A related question is set in next week's tutorial.
Week 6: International trade
This week we only introduce one new topic, international trade. Of course this is only a brief introduction - the field of international economics is a large part of modern economics.
We make the simplifying assumption that the country in question is 'small' - it's activities in buying or selling goods or services do not influence world prices which are therefore given to it. In fact it turns out that this assumption is innocuous for countries like Australia which can probably only influence world prices for a few goods - perhaps wool, iron ore and perhaps coal.
We argue three points for a 'small country':
1. Countries sell things they have a comparative advantage in and buy things they have a comparative disadvantage in. This elaborates an earlier theme - it pays to specialise in producing the goods where comparative advantage lies - in short where opportunity costs are low. It pays to take advantage of the comparative advantages of others by buying goods from them.
2. A shift towards allowing free trade provides positive benefits for some and net costs to others but overall society gains social surplus from trade. International trade provides a group of buyers and sellers in a community with more options and hence net overall advantage even though some may lose.
3. Restricting imports by means of tariffs or quotas reduces the gains from those achievable with free trade but - provided some trade occurs - there are still gains from trade. Thus restricted trade is better than no ntrade but maximum gains are realised by completetely free trade. Trade restrictions are like placing a wall or barrier between groups of people seeking to do deals - while some groups may gain there is an overall social loss since the size of markets has fallen.
These are fascinating propositions that have been well-understood to economists from the time of Adam Smith and David Ricardo. In a sense they are simple ideas but they are widely disbelieved by many citizens and by some foolish politicians.
The hard work in this unit involves modifying the supply/demand diagrams you have learnt to illustrate how the pattern of trade is determined, the gains from trade and the deadweight losses from restrictions on imports.
I am not an international economics expert but the area of trade has fascinated me for more than 20 years. La Trobe University's Department of Economics and Finance has some superb units that focus on trade taught by eminent scholars such as Dr Robert Waschik and Professor Sisira Jayasuriya. I hope this single class introduction to the field of international trade wets your appetite for further study in this area.
We make the simplifying assumption that the country in question is 'small' - it's activities in buying or selling goods or services do not influence world prices which are therefore given to it. In fact it turns out that this assumption is innocuous for countries like Australia which can probably only influence world prices for a few goods - perhaps wool, iron ore and perhaps coal.
We argue three points for a 'small country':
1. Countries sell things they have a comparative advantage in and buy things they have a comparative disadvantage in. This elaborates an earlier theme - it pays to specialise in producing the goods where comparative advantage lies - in short where opportunity costs are low. It pays to take advantage of the comparative advantages of others by buying goods from them.
2. A shift towards allowing free trade provides positive benefits for some and net costs to others but overall society gains social surplus from trade. International trade provides a group of buyers and sellers in a community with more options and hence net overall advantage even though some may lose.
3. Restricting imports by means of tariffs or quotas reduces the gains from those achievable with free trade but - provided some trade occurs - there are still gains from trade. Thus restricted trade is better than no ntrade but maximum gains are realised by completetely free trade. Trade restrictions are like placing a wall or barrier between groups of people seeking to do deals - while some groups may gain there is an overall social loss since the size of markets has fallen.
These are fascinating propositions that have been well-understood to economists from the time of Adam Smith and David Ricardo. In a sense they are simple ideas but they are widely disbelieved by many citizens and by some foolish politicians.
The hard work in this unit involves modifying the supply/demand diagrams you have learnt to illustrate how the pattern of trade is determined, the gains from trade and the deadweight losses from restrictions on imports.
I am not an international economics expert but the area of trade has fascinated me for more than 20 years. La Trobe University's Department of Economics and Finance has some superb units that focus on trade taught by eminent scholars such as Dr Robert Waschik and Professor Sisira Jayasuriya. I hope this single class introduction to the field of international trade wets your appetite for further study in this area.
Wednesday, April 2, 2008
Open thread - the mid-semester examination
The mid-semester examination has been set and will cover all material up to Lecture 11. The examination is compulsory.
If you have problems with unit material you should see you tutor or the lecturer as soon as possible. The 'Help Desk' can also be consulted.
Finally, you can ask questions in the comments section below either anonymously (using a pseudonymn) or using your name.
Don't leave your requests for help to the last few days before the examination.
We are trying to do what we can to offer every possible assistance in this unit. Please take advantage of these opportunities.
If you have problems with unit material you should see you tutor or the lecturer as soon as possible. The 'Help Desk' can also be consulted.
Finally, you can ask questions in the comments section below either anonymously (using a pseudonymn) or using your name.
Don't leave your requests for help to the last few days before the examination.
We are trying to do what we can to offer every possible assistance in this unit. Please take advantage of these opportunities.
Week 5: Welfare economics
This week we are doing some real economics.
We said that the free market maximises the delivery of social surplus. This week we consider three factors that move a market away from its free market equilibrium:
You should also understand the intuition of what they are true - all these distortions place a barrier between groups of buyers and sellers of a good or factor of production like labour.
These results lie at the core of why it is that economists like free trade when there is competition.
We analyse sales taxes in detail.
When taxes are low, DWLs are low as are revenue yields. As taxes increase DWLs increase more quickly than the tax and tax revenues first increase and then decrease as demands become more elastic.
This provides a case for trying to keep taxes low.
We also discuss the Laffer curve which suggests that if labour supplies are very price elastic that reducing high taxes might actually increase revenue yields.
Most people believe the Laffer analysis holds only in extreme situations.
We said that the free market maximises the delivery of social surplus. This week we consider three factors that move a market away from its free market equilibrium:
Price floors - minimum prices that prices cannot fall below e.g. minimum wages.In all these situations social surplus is reduced below its free market levels - this means there are deadweight losses. That is true even when, in the case of taxes, we account for benefits to governments from tax revenue. These are important results and you need to be able to show that they are true by drawing supply/demand diagrams and computing the DWLs.
Price ceilings - maximum prices that prices cannot exceed e.g. rent controls.
Excise or sales taxes - taxes levied as some fraction of the price of a good.
You should also understand the intuition of what they are true - all these distortions place a barrier between groups of buyers and sellers of a good or factor of production like labour.
These results lie at the core of why it is that economists like free trade when there is competition.
We analyse sales taxes in detail.
When taxes are low, DWLs are low as are revenue yields. As taxes increase DWLs increase more quickly than the tax and tax revenues first increase and then decrease as demands become more elastic.
This provides a case for trying to keep taxes low.
We also discuss the Laffer curve which suggests that if labour supplies are very price elastic that reducing high taxes might actually increase revenue yields.
Most people believe the Laffer analysis holds only in extreme situations.
Subscribe to:
Posts (Atom)