政府经济学chapter 4 market failure.doc

Chapter 4 Market failure Last chapter concluded that markets function well, markets bring about an efficient allocation of resources without any need for coordination through government intervention. For this conclusion, we made several assumptions about how markets work. When these assumptions do not hold, our conclusion that the market equilibrium is efficient may no longer be true. In this chapter, let consider briefly three of the most important of these assumptions. First, our analysis assumed that markets are perfectly competitive. In the world, however, competition is sometimes far from perfect. In some markets, a single buyer or seller (or a small group of them) may be able to control market prices. This ability to influence prices is called market power. Market power can cause markets to be inefficient because it keeps the price and quantity away from the equilibrium of supply and demand. Second, our analysis assumed that the outcome in a market matters only to the buyers and sellers in that market. Yet, in the world, the decisions of buyers and sellers sometimes affect people who are not participants in the market at all. Pollution is the classic example of a market outcome that affects people not in the market. Such side effects, called externalities, cause welfare in a market to depend on more than just the value to the buyers and the cost to the sellers. Because buyers and sellers don not take these side effects into account when deciding how much to consume and produce, the equilibrium in a market can be inefficient from the standpoint of society as a whole. Third, all market participants have the same information about the nature of the good and the circumstances under which it is traded. Yet, in the world, there is asymmetric information between buyers and sellers. If one or more of these assumptions does not hold, the market system does not give rise to an efficient outcome (i.e. the first theorem does not hold). These inefficient outcomes are