EconomicsNotes

    The main idea associated with Vilfredo Pareto is that, where price is equal to marginal cost, no one can be better off without someone else being worse off. This means that the Pareto point shows allocative efficiency, or an economy in which everyone has everything at its ‘true’ value. This is distinct from productive efficiency, in which everything is produced at the marginal efficient scale, or lowest long-run average cost.   Both forms of efficiency are predicated on the idea that the equilibrium price in a market reflects both social marginal costs and benefits, and private marginal costs and benefits. An additional assumption is that a situation in which firms essentially produce in perfect competition (the only market structure in which allocative and productive efficiency arise) is the best use of resources. A moment’s reflection, however, illustrates that this is not true. Negative and positive externalities of production and consumption exist, for insta...

  Privatisation is the transfer of government owned assets to the private sector so that an institution or company which is a cost to taxpayers becomes a dynamically efficient taxpayer itself, adding to, rather than subtracting from, the national budget. It can take a variety of forms, such as sell-offs, break-ups, popular share ownership, the introduction of private finance initiatives, and internal markets, as well as franchising. Healthcare is a merit good which in some respects has elements of natural monopoly, or at least economies of scale. So, for instance, if left to itself, the market will provide the same or better drugs and procedures, and forms of prevention, rehabilitation and care, which the NHS provides. It will provide them at a very high average cost, however. This higher price would be met by co-pay, insurance, or direct spending arrangements on the part of those who now get the service for a relatively small amount of tax, for as long as they need it. In ...

  Indirect taxes are taxes which are levied on producers by the government, part or all of which the producer can choose to pass on to the consumer. If the consumer is price sensitive , the producer will absorb the part of the tax which enters the producer’s previous producer surplus and pass on the part that is within the pre-tax consumer surplus. In situations where the consumer’s demand is completely elastic, the producer will absorb the full cost.      The qualities of demerit goods make them attractive for the imposition of indirect taxes. A demerit good is something that is acknowledged to be, on balance, bad for society and for individuals. The demerit good imposes costs upon third parties, society in general, and possibly users with imperfect information. These negative externalities mean that the private market price and the optimum social price, once social marginal cost is considered are different.   Overall, the market will oversupply and under-...

  Nationalisation means the process whereby a business is taken into government ownership and is run by a public authority. Between 1945 and 1985, many British companies were nationalised ones. Governments, starting consistently in the 1980s, sold these companies to the private sector with the aim of changing companies which required public funding into ones that generated tax revenue. In addition, attempts were made to create or emulate markets in the areas where the firms operated, often by breaking the firms up into a number of new ones, so as to introduce choice for customers, competition, and dynamic efficiency. A trade-off was accepted in which formerly public companies made private profits, often accompanied by subsidy, for shareholders, but where shareholders invested in infrastructure and capital. This was accompanied by government regulation of price and services. It was the case, however, that many industries were originally natural monopolies. This is a situation in w...

  Evaluating the likely micro- and macro-economic effects of price controls. Price controls are legal restrictions on the maximum or minimum prices that can be charged for a good. They are imposed by governments either in for the long-term  because of structural problems in a market or political choices, or as short-term provisions in an emergency. They work by making it illegal for traders and consumers to buy or sell goods outside of the set price. If a government imposes a maximum price above the market equilibrium, or a minimum price below the market equilibrium, this should not have any effect on the market equilibrium. Instead, a maximum price for rent, for instance, set above the equilibrium, would in theory restrain bad landlords from exploiting renters. Those economists who believe in free markets would say that landlords should be allowed to practise first degree price discrimination and to charge whatever the market will bear (whatever someone is prepared to...