Certain economic complications

 ‐market failures
  ‐what is a market failure?
   ‐in certain circumstances normal assumptions of microeconomics fail
    ‐imperfect competition; price‐giving; TOT
    ‐imperfect internalisation; externalities; nonexcludability and public goods
     ‐the connection to Marshall’s theory of joint supply
     ‐can be analyzed as externalities, but this doesn’t really capture the
      essence of it
    ‐bounded rationality; irrationality
    ‐imperfect and asymmetrical information
     ‐markets in lemons
      ‐moral hazard
      ‐adverse selection
    ‐barriers to entry and exit from an industry
     ‐a problem only when built purposefully
     ‐strategic behavior in the game theory sense
      ‐credibility of a threat of suicidal competition
       ‐e.g. costs sunk into excess production capability can be give
        credibility to such a threat
       ‐in the absence of competition, the costs of strategic behavior can
        still be covered
     ‐strategic entry deterrence
      ‐possible to implement on the market
      ‐usually we’d like extra‐market measures, though
  ‐what is not a market failure
   ‐creative destruction (Schumpeter)
    ‐in order to create new, we must often discard the old
    ‐this upsets the status quo, and even when good in toto, can harm special
    ‐this is the mechanism behind obsolescence of skills and the resulting
   ‐types of monopolies, cartels, trusts, whatever…
    ‐natural monopolies
     ‐a direct result of efficiency considerations
      ‐increasing returns to scale
       ‐these can push the minimum efficient size of a firm to a level where
        the firm becomes a (partial) price‐giver; sometimes they can swamp any
        benefits of competition
        ‐e.g. distribution networks for electricity, gas, water
       ‐Kemp’s theory of unstable specialization in international trade
      ‐network effects/externalities
       ‐these are demand/consumption side positive externalities which give
        returns to scale in a form which cannot even theoretically be
        ‐e.g. (tele)communications networks
     ‐yet may be harmful to competition
     ‐some think this type of monopoly is not a market failure at all
    ‐unnatural monopolies
     ‐regulation of functioning private markets
      ‐regulation on moral grounds
       ‐the drug, alcohol and tobacco markets
       ‐certain environmental legislation
      ‐regulation on fuzzy utilitarian grounds
       ‐housing standards
     ‐governmental production in private goods with functioning markets
     ‐governmentally financed private production in private goods with
      functioning markets
   ‐how monopolies affect competition
    ‐discriminatory pricing
    ‐tying arrangements, bundling
    ‐effects on economic efficiency and the production of welfare
   ‐bilateral monopolies, monopsonies and oligopolies
    ‐these give rise to bargaining costs
     ‐when there are no independent buyers/sellers, no market price will be
     ‐there is no way to know how gains from trade will be divided
      ‐there will be lots of haggling, with each side trying to capture most
       of the gains
     ‐the trade may never be made if the distributional issue isn’t resolved
  ‐public/nonexcludable goods
   ‐public does not mean these should be produced governmentally!
    ‐(perfect) inelasticity of supply
     ‐there are two kinds of externalities, production and consumption
      ‐we can argue that morality controls the latter
      ‐both can be present at the same time
      ‐the difference is notable: e.g. voucher schemes are a concession to
       the possibility of a consumption externality without the corresponding
       benefits of joint production
     ‐Pigovian reasoning
      ‐there is harm and there is utility, these can be easily determined
      ‐the one to benefit is also the one to pay the costs
      ‐the state will apply marginal tax‐pricing and redistribute to those
       who have suffered damage
       ‐usually we end up with the money going to general consumption, which
        isn’t what Pigou suggested; it isn’t efficient
      ‐the same idea can be applied in reverse, to positive externalities
     ‐Coasian reasoning, the Coase theorem
      ‐harm is a relative thing, it is usually the product of joint causation
       ‐each situation is different
       ‐moral or other arbitrary grounds are not good enough to guide the
        initial allocation of rights
      ‐any initial allocation will lead to an efficient outcome when
       transaction costs are nil
       ‐a priori no allocation is better than another
       ‐efficiency calls for relativity in who alleviates the problem
      ‐so, transaction costs are what matter
       ‐these must be minimized
       ‐we get Coasian rights allocation: rights are allocated in a manner
        which is expected to minimize later transaction costs
        ‐is this necessarily libertarian?
         ‐depends on what we take to be libertarian
         ‐we can use this to justify ICANN’s interference on the domain
          name market, and the existence of the UDRP
      ‐Coase also points out that once rights have been allocated, even the
       distribution will not change; any apparent distributional changes will
       be compensated by institutional change which gives the payer back
       whatever extra he now seems to be paying
       ‐this does not hold with the initial allocation; in fact, when this
        does not hold, there are efficiency grounds for the allocation of a
        new right; this is how rights are borne in the Coasian frame!
   ‐taxation as a means of finance
    ‐based on a reverse Pigovian reasoning: a public bad should be payed
     for by whoever reaps the benefits, and the same should apply to public
    ‐optimally financing for truly public goods
     ‐but only those public goods which cannot be produced privately!!
     ‐unfortunately most of the goods financed by taxation suffer from no
    ‐nonconsensual pricing
    ‐environmental taxation
    ‐the general theory of the second best
     ‐lower taxes are only good when they apply uniformly; otherwise they will
      be distortionary
      ‐but: taxes are always distortionary as they shift money from the private
       to the public sector; in this sense, higher taxes can only be efficient
       when they are used with higher marginal efficiency than the marginal
       benefits of evening out relative prices
   ‐risk management is sometimes a public good among a particular group of people
    ‐risk is managed by sharing it; insurance
    ‐the insurance business suffers from a couple of unique problems
     ‐adverse selection
     ‐moral hazard
   ‐Buchanan’s models of multiple public goods without a private numeraire
    ‐political processes can be modelled as such
    ‐cyclical majorities, both in the static (no coherent ordering can be
     derived) and the dynamic (periodic rotation of two out of three
     majorities) version
    ‐vote‐trading can lead to Pareto‐inoptimal results
    ‐joint consideration of all the issues plus a Wicksellian unanimity rule
     will lead to efficiency when in the large crowd situation
     ‐Wicksell suggested that to curb any remaining strategic behavior,
      something like a 5/6 supermajority should do
      ‐the idea was not to overrule the last 1/6, but to enable a closer
       approximation to unanimity when strategic bargaining was no longer an
 ‐inconventional competition
  ‐countervailing power (Galbraith)
   ‐in effect the risk of entry
   ‐cf. strategic entry deterrence
  ‐monopolistic competition and partial monopolies
   ‐typical examples
    ‐product differentiation
    ‐monopolies on location
   ‐the tangency equilibrium
   ‐imitation lag and product cycle theories
     ‐Linder’s theory of intra‐industry trade
    ‐centers on trade between countries of comparable average per capita
     income; a demand based theory of differentiated goods
 ‐path dependency
  ‐the role of sunk costs in the genesis of monopolies and oligopolies
  ‐connects heavily with the idea of a general equilibrium, without a
   unique, stable equilibrium, but instead with a moving, adaptive, chaotic
   economy tending towards what is efficient at the moment
  ‐switching costs
   ‐dependency; drug addiction