ECON 208 Lecture Notes - Imperfect Competition, Perfect Competition, Marginal Cost

• School: McGill University
• Department: Economics
• Course: ECON 208
• Professor: Michel Lapointe

Document Summary

The operative choice is between which mix of markets and government intervention best suits people"s hopes and needs. Idea that institutions are important to ensure that citizens can safely carry on their ordinary economic and social activities. Importance of institution building: challenges in developing countries that stem from their ineffective political structures. The formal case for free markets is based on the concept of allocative efficiency. Total surplus to society is maximized. Market failure: a situation in which the free market fails to achieve allocative efficiency: market power, externalities, public goods, asymmetric information. Externalities: when actions taken by firms or consumers impose costs or confer benefits on third parties. Externalities and the coase theorem: both sides will bargain for an allocatively efficient outcome. Caveats: property rights are not always clearly assigned. Taxes should be put for negative externalities to prevent excessive supply. Subsidies should be put on positive externalities to prevent a shortage of supply.