Section VII. Market failure and government regulation

Basic concepts. Market failures. External (side) effects. Public goods and services. Regulation of the consequences of external (side) effects. Income inequality and income redistribution by the state. Methods for measuring income inequality: partial and integral. Lorentz curve.

Additional concepts. Marginal private costs, marginal external costs and benefits. Social benefits from positive externalities and social losses from negative externalities. Adjustment taxes and subsidies. Vertical summation of demand for public goods. Gini coefficient. Purchasing power indicators.

Basic skills. Determine the equilibrium in markets with external effects, with compensatory influences from the state and third parties. Measure income inequality using private indicators. Build LoRenz curves.

Additional skills. Determine social benefits from positive externalities and social losses from negative externalities, as well as adjusting pledges and subsidies. Calculate the Gini coefficient. Calculate Pointers of Purchasing Power. Determine the equilibrium of demand for public goods using the vertical summation of demand.

Theoretical material

External effects.

Negative externalities associated with the costs of third parties.

Disregarding negative externality, supply coincides with the rising marginal private cost curve ( marginal private cost): S = MPC.

If negative externality is taken into account, then the proposal should match the marginal social cost curve ( marginal social cost):

S "= MSC= MPC + MEC,

which summarizes the marginal private and marginal external costs ( marginal external cost(MEC)).

The demand curve in this model coincides with the marginal social benefits: D = MSB(marginal social benefits).

Area of ​​a triangle ME 1 E 2 shows social losses from negative externality.

Adjustment tax ( t) raises marginal private costs to the level of marginal social costs, i.e. t= MONTH

Positive externalities associated with the benefits of third parties.

Disregarding positive externalities, demand coincides with the descending curve of marginal private benefits ( marginal private benefits): D 1= MRV.

If the positive externalities are accounted for by increasing demand, then the new demand should coincide with the marginal social benefit curve.

D 2= MRV + MEV,

which summarizes marginal private and marginal external benefits.

The supply curve in this model matches the marginal social cost: S = MSC(marginal social cost).

Area of ​​a triangle ME 1 E 2 shows the social benefits of positive externality.

Adjustment subsidy ( s) raises the marginal private benefits to the level of marginal social benefits, i.e. s = MEB.

In practice, more often the positive externality is offset by an increase in supply.

Market failure and the role of the state

The first manifestation of market failure is that the outcome of the market depends on the decisions made by buyers and sellers. However, sometimes these decisions affect the well-being of people outside the market. There are so-called externalities (externalities), when the equilibrium in the market may be ineffective for society as a whole.

The second manifestation of failure is the inability of the market to ensure the production of public goods.

The third manifestation of insolvency: Most markets are characterized by severe breaches of competition, market power, or monopoly.

Finally, the market is also untenable in achieving a fair distribution of income.

To overcome market insolvency, the state comes to the aid of the economy, which seeks to solve two interrelated tasks:

1) ensure the normal functioning of the market system;

2) solve acute social and economic problems.

There are two situations of severe disruption of the functioning of the market system:

a competitive market system produces “the wrong” quantities of certain goods and services that society needs (ie allocates the “wrong” amount of resources);

a competitive market system is generally unable to allocate resources for the production of certain goods and services.

External effects

The first situation is related to the presence of externalities.

An external effect (externalization) occurs when some benefits or costs associated with the consumption or production of a good are “transferred” to persons who are neither buyers nor sellers (producers) of this type of goods. They, therefore, cannot be reflected in the supply and demand curves of a given type of goods.

In other words, the market is not able to capture all the costs or benefits that arise in the production or consumption of a product: they arise "outside" the market. Thus, the market is not able to allocate the optimal amount of resources for the production of the optimal, from the point of view of society, the amount of goods.

Externalities arise both in connection with the production of goods and services (negative) and in connection with consumption (positive).

External effects associated with production arise in the production of some goods if the private costs of firms (private costs are shown by the curve S in Fig. 9.3) are less than the costs of society as a whole ^ societies).

An example of negative external effects is environmental pollution by the metallurgical, chemical industry, etc. Rice. 9.3 shows that if all costs were reflected in the supply curve ^ of societies), then the volume of production optimal for society would be less (bot ™< Qe), чем производят фирмы, следовательно и загрязнение окружающей среды было бы меньше. Государство может решить эту проблему двумя путями:

legislate pollution standards, forcing firms to build wastewater treatment plants (which will increase their costs and reduce supply) and penalize them for violations;

introduce a special indirect tax (Pigou tax), which increases the costs of the firm and shifts the supply curve to the left (in Fig. 9.4 from position S to position Sr, T tax).

The second method makes it possible to transform external effects into internal production costs (this method is called internalization). Some economists believe that this way of dealing with externalities is preferable. First, it is associated with the use of market methods of influence by the state (therefore, it excludes corruption). Secondly, the funds collected in the form of tax allow the state to carry out its own expenditures for the protection of the environment. In both cases, the amount of resources directed to these industries will decrease.

Consumption-related externalities arise when the benefits received by society from the consumption of certain goods and services by people cannot be fully reflected by the market demand curve (in Figure 9.5 Do6l4ecra.> D), therefore, the market allocates too few resources and cannot ensure the production of an optimal volume of products (Qe< боптим. на рис. 9.5).

The state can use one of two options for internalizing positive externalities:

1) subsidizing consumers to increase demand (the market demand curve in Fig. 9.5 will shift to the right to the position Do6l4ecra, 5 the equilibrium price will rise to P °, which will ensure production by the optimized market.);

If the positive externalities are very high, then the state can turn these industries into its own property or take over their financing (the products of such industries are called quasi-public goods). Examples of such industries are:

public health care;

public housing construction;

libraries, museums, streets, highways, etc.

Public goods

The second situation of disruption of the functioning of the market mechanism is due to the fact that competitive markets are generally unable to allocate resources for the production of public goods.

The objects of the market mechanism are private goods. Private goods are divisible and subject to the principle of exclusion (the goods are received by those who want and can pay the market price).

But there are goods and services that are indivisible and not subject to the principle of exclusion of public goods. (Quasi-public goods are subject to the principle of exclusion, but they are indivisible.)

In addition, benefits from private goods are realized as a result of their consumption, and from public goods as a result of their production. The most typical examples of public goods are:

national defense;

environmental protection;

national parks, etc.

The resources necessary for the production of public (and quasi-public) goods are allocated on the basis of political decisions and financed from the state budget (through taxes).

MARKET FAILURE / MARKET FAILURE

There are various reasons why an unregulated market cannot provide an ideal state of affairs. The main causes of market failure / failure are monopoly, externalities and the problem of income distribution. Profit maximization under monopoly conditions is accompanied by artificial limitation of production and overpricing of goods. If the production or consumption of a good is based on savings due to external factors, then in an unregulated market there may be a shortage of this good; if we are talking about negative effects, then the product is in excess. Public goods in a pure market economy are not produced in sufficient quantities. It is also possible that the market will lead to income distributions that are socially unacceptable. At first glance, various market imperfections are a compelling argument in favor of government regulation of the markets for some goods, the production of some other goods in the public sector, and in favor of income redistribution. However, all these measures can also potentially be ineffective, so when making decisions in a mixed economy, it is necessary to use the principle of second best.

Market failures are the main reason for government interference in the organization of industry markets. These include monopoly power, externalities (externalities), public goods, and information imperfections. The leading goal of government sectoral policy is to address market failure to improve public welfare.

Markets also turn out to be insolvent in terms of efficient production of public goods, which, without state intervention, either will not be released at all, or will be, but in insufficient quantities. The socially necessary level of output of public goods is determined by the point of equality of the marginal social benefit, the marginal social cost of production. The costs of producing public goods are divided among consumers according to how highly they value them.

Neoclassical analysis proceeds from the assumption that the market will produce a suboptimal (partially optimal) volume of production, since it is in the interests of the individual to reduce the value of a public good in order to reduce his contribution to the costs of providing this good to society. For example, if an individual claims that a public good has no value (value) for him, then the market will not provide enough of it.

If we assume the presence of perfect information and the absence of transaction costs, the above motives will disappear and the volume of output will reach the socially optimal level. Underdelivery can only occur in the case of imperfect information and transaction costs.

Market failure manifests itself in the event of externalities (externalities). They occur when an economic agent is unable to take into account the consequences of its activities for other individuals. In the event of externalities, social costs and benefits do not coincide with private costs and benefits, and the volume of output decreases in comparison with the socially optimal one and there are losses of welfare.

If the independent functioning of the sectoral market becomes ineffective, i.e. entails an irrational use of resources, then in this case market failures are possible and intervention from the state is justified, especially if it is carried out in compliance with the Pareto principle. On insolvent industrial markets, the industrial policy of the state can be implemented in the form of direct, indirect and fragmentary interference in its activities.

The main concepts that form the basis of sectoral policy are:

– economic efficiency... In the market, economic efficiency is achieved through the action of the main market mechanism - competition. It causes the desire of commodity producers to implement the achievements of R&D, reduce production costs, improve product quality and increase its output. But the state must support the development of healthy competition in the market;

– optimization of the behavior of economic agents.

The sectoral policy of the state is carried out by various methods, with varying degrees of direct involvement of the state in making economic decisions. With the growth of state activity in the economy, the following types of sectoral policy can be distinguished (Table 2).

Types of sectoral government policy

Passive protective sectoral policy sets the main goal of combating monopolies, whose activities lead to inefficient allocation of resources and create losses in public welfare. An indispensable part of this policy is antitrust regulation, control over horizontal and vertical mergers and acquisitions.

Such a policy is considered protective, since the state only opposes the emergence and use of monopoly power. It is passive since, on the one hand, its activities are carried out only under the condition of a significant deviation of the market structure from the competitive one, on the other hand, this type of sectoral policy does not cause any production activity.

Passive and defensive sectoral policies serve only as a prototype for sectoral policies for most modern economies of international trade. More active antitrust regulation by any country leads to a decrease in the profits of domestic firms in favor of foreign monopolies, both in the domestic market and in the market of third countries.

The concept of a "favorable economic climate" (offensive but passive sectoral policy) involves not only limiting and fighting monopoly power, but also promoting specific types of economic activity. Thus, for example, tax and financial incentives for small and medium-sized enterprises do not fit into the framework of antitrust regulation itself, but contribute to the development of competition. Another example of a policy that promotes competition is anti-inflationary policy. The presence of positive goals of the state's economic activity allows us to classify this model as “offensive”. The passivity of this type of sectoral policy is that it only improves the conditions for making decisions by firms and households, but does not aim to influence specific decisions.

This model of economic policy is closest to governments that reject active intervention in the economy. However, the implementation of such a policy runs up against problems such as, for example, the problems of structural unemployment and unbalanced economic growth, which may still require more specific measures from the state.

An active defensive industry policy uses measures that have a specific focus, but in order to prevent certain decisions of firms. An example is the protectionist foreign trade policy, which has a significant impact on the development of sectoral structures. The countries of the European Community adopted a similar policy model in the 70s and 80s. under the influence of increased competition from Japan and newly industrialized countries in the world market.

An active offensive sectoral policy is characterized by a combination of specific, along with general, and positive goals and the directed influence of the state on the decisions of economic agents. This is the sectoral policy in any reformed economy. The depth and forms of government intervention in sectoral development can be different. This sectoral policy has the most significant impact, both positive and negative, on the development of the economic system as a whole.

Market failure- these are situations when the market is unable to efficiently allocate available resources. Major manifestations of market failure (market failures): the problem of the production of public goods, the problem of externalities, the problem of supporting competition, the problem of uneven development, the problem of uneven distribution of income and wealth, the problem of incompleteness and asymmetry of information.

Non-market external (side) economic effects (externalities) arise when the results and / or costs of the economic activity of the participants in market transactions, for one reason or another, are not fully recorded in the amount of goods, resources and in their prices, in costs and proceeds, payments and receipts of the participants themselves, but at the same time affect the welfare of third parties persons not participating in transactions. External effects (externalities) also include non-market or non-market influences of the activity of one economic entity, individual or legal entity, on the welfare of another, who does not pay for these influences when they are positive, and does not receive compensation for them when they are negative, directly to or from the one who creates them.

It is natural to call those who create external effects generators, and those who perceive them - recipients of externalities. Externalities are subdivided into positive and negative, depending on the direction of their influence on the welfare of recipients 188.

Negative externalities

1. External production costs: MSC = МРС + МЕС, where MSC- marginal social costs, MRS- marginal private costs, MONTH- marginal external costs: MES = MSC - MRS, i.e. MSC> MPC.

If the marginal social cost is greater than the private marginal cost, then the externality is negative.

Society Optimum: MSC = MSB or MSC = P.

Manufacturer's Optimum: MPC = MRV or MPC = P, where MSB- marginal social benefits, MRV- marginal private benefits.

An example is the pollution of water, soil, air as a result of the work of a private enterprise. In this case, the marginal social cost will be higher than the private marginal cost of the business owner. Graphically (Fig. 94) this is reflected in the shift to the left of the curve MSC in relation to the curve MRS, characterizing the offer of the manufactured product. With the current stable price of the product on the market, the demand curve can be represented by a horizontal line at the level R.

Rice. 94. Negative production externality

The equilibrium point of the firm will then correspond to the volume of production Q 1. In the interests of society, it is necessary to reduce the volume of environmentally harmful production to the level Q 2 those. eliminate the negative effect of production (MES) in volume (Q 1 - Q 2). Optimum of society MSC = MPC; no external effect. It should be noted that such an optimum does not mean the complete absence of a negative side effect, but the damage is significantly reduced.

2. External costs of consumption of MSB