Introductory Economics Cheatsheet
Coordination by Market
Princes as signals of scarcity/abundance
Requires much less info
No enforcement costs
No principal-agent problem
No problem with multiple decision makers
Qualification: some command systems exist within a market (eg firms)
Has free-rider problem due to non-excludability.
Can only be provided by a coercive authority that can force users to pay for these goods. Taxes.
Provide benefits for a group.
Cartels and Unions
Has free riding problem.
Prevent by sanctions
Non-excludable but exhaustible
Natural resources goods
Lack of well-defined property rights encourages overuse. The tragedy of the commons.
Solve by asserting ownership rights over common resources.
Markets generate themselves for property transfer that internalize externalities.
Adverse selection & Moral hazard
Market price based on expected quality
Reward people for not maintaining quality
High quality sellers drop out
FDI promotes technology transfer without moral hazard.
Equilibrium – no one has an incentive to change their behavior.
Cause a shortage due to excess demand
Leads to rationing or preferential allocation, long queues, inefficiency. Those who do get will benefit from the lower prices.
Eg Minimum wage
Only those workers who don’t lose their jobs benefit from the higher wages.
When price goes down, CS increase due to 2 reasons. Existing buyers pay less. More buyers are able to enter market.
Markets select low cost suppliers.
Only those whose costs of production are below the market price enter.
When price goes down, ‘marginal seller’ drops out.