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    Managerial Economics: PGP - 1, Section A Term 1

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    Akshay
    This document summarizes key concepts from a lecture on asymmetric information in labor markets, externalities, public goods, and market failures. It discusses efficiency wage theory, the shirking model, efficiency wages, externalities, property rights, common property resources, ways to correct market failures like emissions standards and fees, characteristics of public goods like being nonrival and nonexclusive, free riders, and an example of market failure providing a mosquito abatement program.

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    Managerial Economics: PGP - 1, Section A Term 1

    Uploaded by

    Akshay
    15 views11 pages
    This document summarizes key concepts from a lecture on asymmetric information in labor markets, externalities, public goods, and market failures. It discusses efficiency wage theory, the shirking model, efficiency wages, externalities, property rights, common property resources, ways to correct market failures like emissions standards and fees, characteristics of public goods like being nonrival and nonexclusive, free riders, and an example of market failure providing a mosquito abatement program.

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    Microeconomics Lecture slides

    Original Title

    Lec 20

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    This document summarizes key concepts from a lecture on asymmetric information in labor markets, externalities, public goods, and market failures. It discusses efficiency wage theory, the shirking model, efficiency wages, externalities, property rights, common property resources, ways to correct market failures like emissions standards and fees, characteristics of public goods like being nonrival and nonexclusive, free riders, and an example of market failure providing a mosquito abatement program.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    15 views11 pages

    Managerial Economics: PGP - 1, Section A Term 1

    Uploaded by

    Akshay
    This document summarizes key concepts from a lecture on asymmetric information in labor markets, externalities, public goods, and market failures. It discusses efficiency wage theory, the shirking model, efficiency wages, externalities, property rights, common property resources, ways to correct market failures like emissions standards and fees, characteristics of public goods like being nonrival and nonexclusive, free riders, and an example of market failure providing a mosquito abatement program.

    Copyright:

    © All Rights Reserved
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    of 11

    Managerial Economics

    PGP - 1, Section A
    Term 1

    Lecture 20
    Instructor: Tirthatanmoy Das
    Indian Institute of Management Bangalore
    Aug 20, 2019
    Asymmetric information in labor markets

    Efficiency wage theory: Explanation for the presence of


    unemployment and wage discrimination which
    recognizes that labor productivity may be affected by the
    wage rate.

    Shirking model: Principle that workers still have an


    incentive to shirk if a firm pays them a market-clearing
    wage, because fired workers can be hired somewhere
    else for the same wage.
    2
    Asymmetric information in labor markets

    Efficiency wage: Wage that a firm will pay to an


    employee as an incentive not to shirk.

    If a firm pays its workers the market-clearing wage w*,


    they have an incentive to shirk. Why?

    As an incentive not to shirk, a firm must offer workers a


    higher wage. Because if fired for shirking, the employee
    will face a decrease in wages. Why? 3
    Asymmetric information in labor markets

    But all firms can offer efficiency wage. Then why


    would’nt a worker shirk?

    4
    Externalities and public goods

    Externality: Action by either a producer or a consumer


    which affects other producers or consumers, but is not
    accounted for in the market price.

    Externalities can be negative—when the action of one


    party imposes costs on another party—or positive—when
    the action of one party benefits another party.
    5
    Externalities and property rights

    Property rights: Legal rules stating what people or firms


    may do with their property.

    6
    Common Property Resources
    Common property resource: Resource to which anyone
    has free access.

    § Occasionally externalities arise when resources can be


    used without payment. As a result, they are likely to be
    overutilized.
    § Example: In many fishing areas in the United States, the
    government determines the annual total allowable catch
    and then allocates that catch to fishermen through
    individual fishing quotas determined through an
    auction or other allocative process. 7
    Correcting market failure
    We can encourage the firm to reduce emissions to E* in
    three ways: (1) emissions standards; (2) emissions fees;
    and (3) transferable emissions permits.
    § Emissions standard: Legal limit on the amount of
    pollutants that a firm can emit.
    § Emissions fee: Charge levied on each unit of a firm’s
    emissions.
    § Tradable emissions permits: System of marketable
    permits,allocated among firms, specifying the
    maximum level of emissions that can be generated. 8
    Public goods
    Public good: Nonexclusive and nonrival good: The
    marginal cost of provision to an additional consumer is
    zero and people cannot be excluded from consuming it.

    § Nonrival good: Good for which the marginal cost of its


    provision to an additional consumer is zero.

    § Nonexclusive good: Good that people cannot be


    excluded from consuming, so that it is difficult or
    impossible to charge for its use. 9
    Public goods and market failure
    Free rider: Consumer or producer who does not pay for
    a nonexclusive good in the expectation that others will.

    § With public goods, the presence of free riders makes it


    difficult or impossible for markets to provide goods
    efficiently.
    § Voluntary private arrangements are usually ineffective.
    § The public good must therefore be subsidized or
    provided by governments if it is to be produced
    efficiently. 10
    Public goods and market failure
    Market failure example:
    § Suppose you want to offer a mosquito abatement
    program for your community. The program is worth
    more to the community than the $50,000 it will cost.
    Can you make a profit by providing the program
    privately?
    § You would break even if you assessed a $5.00 fee to
    each of the 10,000 households in your community.
    § Unfortunately, mosquito abatement is nonexclusive:
    There is no way to provide the service without
    benefiting everyone. 11

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