Ch 8.docx

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Department
Economics
Course
ECO440H5
Professor
Multiple Professors
Semester
Winter

Description
Ch 8 adverse selection when a party enters into an agreement in which they can use their own private information to the disadvantage of another partyasymmetry of information a market situation where all participants do not have access to the same level of informationdeadweight loss the loss in allocative efficiency occurring when the loss of consumer surplus outweighs the gain in producer surplusexternatlity the cost or benefit arising from an individuals production or consumption decision which indirectly affects the wellbeing of othermarket failure a situation in which the market does not result in an efficient allocation of resources Monopoly power the ability of a monopoly to raise prices by restricting outputmoral hazard a situation in which one of the parties to an agreement has an incentive after the agreement is made to act in a manner that brings additional benefits to themselves at the expense of the other partynatural monopoly a situation where one firm can meet market demand at a lower acerage cost than two or more firms that could meet that demandpublic good a s good or service that can be consumed simulatenously by everyone and from which no one can be excludedsocial cost the total costs associated with an activity including both private costs and those incurred by society as a wholesupplierinduced demand the demand that exists beyond what would have been asked by consumers if they had been perfectly informed about their health problems and various treatments availabletransaction costs costs of engaging in tradeie the costs arising from finding someone whom to do business of reaching an agreement and of ensuring the terms of the agreement are fulfilledMarket Failurewhen markets fails to have perfect competition arise we refer to it as market failure as the market is unable to achieve an efficient allocation of resrouces In fact markets do not work well in all situation and health care is a very good example of thisthe health care market is characterized by a number of market failures monopoly externalities public goods and asymmetry of informationMonopolya monopoly is characterized by a single supplier in the market A natural monopoly is a situation where on firm can meet market demand at a lower average cost than two or more firms could meet that demandhowever monopoly can occur as a result of other conditionsthere are barriers to entrythere are few providersthere are few close substitutesbarriers to entry imply that it is difficult to participate in the market In health care barriers to entry exist in the form of professional bodies so that the supply of professionals is restrictedthe scarcity of hospitals in rural areas is also a good illustration of few providersalso there are few close substitutes for many health care goods and services such as an emergency caesarean sectionas a result of monopoly firms are no longer price takers but have influence over the market price and the output level of production Monopolies have an incentive to push up prices and restrict output produced To maximize profit they set output where where marginal revenue equals marginal costfig 81 illustrates the price and output decisions of a monopolistfor a monopoly marginal revenue is below the demand curvethe corresponding output that they can produce at point Pmon can command a pricein a perfectly competitive market the firm would have to produce where MCD marginal costdemand Ie Supplydemand because remember supply marginal cost and demandmarginal benefit This where the output Qcomp is higher and price is lower Pcompthis means that monopoly is in efficient Monopolies transform consumer surplus into producer surplushowever the loss in consumer surplus is greater than the gain in producer surplus Therefore there is an overall loss to society known as deadweight loss a measure of loss in allocative efficiencyMRmarginal revenuesometimes a monopoly will price discriminate so that marginal revenue is the same as the demand curveprice discrimination means offering the same product at different prices to different peoplefor example railways and airlines often charge lower pices for students young people and elderlythis is not an act of generosity but rather a way of maximizing profits
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