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Key Issues faced by Modern Firms

Appunti sulle maggiori problematiche affrontate dalle aziende in termini di comportamento tra rivali. In queste pagine si sviluppano, in maniera accurata e specifica, concetti di: market efficiency, coase theorem e information assymetries. Scarica il file in formato PDF!

Esame di Introduction to the Modern Firm 2 docente Prof. M. Warglien





When the mill and the farmer negotiate an efficient agreement they are in effect

creating a market for exchanging property rights to a good.

Prior to their negotiation, a negative externality was present because those markets

didn’t exist. In fact, every externality can be traced to a missing market and private

negotiation remedies the externality by creating a market.

Why might two or more parties fail to address an externality through negotiation,

despite the promise of mutual benefit?

Many of these factors cause the market to fail and thereby to give rise to externalities,

which can also cause bargaining to break down.

1. Bargaining can be impractical and costly in terms of time and effort.

2. Assessment of property rights ca be ambiguous, based on conflicting legal

precedents: the owner of the mill may believe to have the right to pollute

whereas the farmer may believe to have to right to have clean water. In such a

cases the two parties might find themselves in a costly legal battle.

3. Limited information availability

4. Incomplete and so inefficient contracts may be difficult to enforce. In some

cases parties might not be able to monitor compliance with an agreement or

monitoring might by very costly


The conclusion of the “invisible hand of the market” promotes economic efficiency,

where each consumer’s well-being depends only on her own consumption and where

each firm’s output depend only on its own production decisions.

However, choices can profoundly affect the well-being of others. In such cases, the

competitive markets fail to allocate resources efficiently. Therefore, externalities

born: actions if these affect someone with whom the decision

Externalities are created by

maker is not engaged in a related market transaction. They can be negative if they

affect someone (pollution) or positive if they benefit someone else (public good).

Negative externalities:

- Pollution

- Someone that lights up a cigarette in a close and public place

Positive externalities:

- Abatement of pollution

- The consumer to decides to buy something and the seller who decided to

provide a service 2


When a consumption or production activity creates an externality, competitive

markets will usually allocate resources inefficiently.

Why? private

When an externality is present the cost and/or benefit of an activity to the


party who performs it differ from the costs and/or benefits of that activity, which

include effects on other parties. In a competitive market each consumer purchases a

private MB = P.

good up to the point at which her therefore, a competitive equilibrium

ensures that private marginal benefit equals the private marginal cost.

social MB = social MC.

But from the social perspective, efficiency requires that If either

the consumption or production of the good creates negative externalities, then

equality between private MB and private MC will imply that social MB is < social MC.

From society’s perspective, that means a small reduction in the level of consumption

and production would increase welfare, so that level is too high. On the contrary, if the

consumption or production of goods creates a positive externality, the equality

between private MB and private MC will imply that social MC > social MC. So, an

increase in consumption or production would increase welfare, so the level is too low.

Public goods non-rival non-

Public goods are a positive externality. A public good is a good and

excludable .

A good is non-rival if more than one person can consume it at the same time

without affecting its value to others.

A good is non-excludable if there is no way to prevent a person to consume it.

For example, national defence is a public good, because one citizen’s enjoyment of

national security doesn’t reduce the its value to others and because there is no way to

withhold the benefits of it from any particular person.


are present when one party has more information on the

Information asymmetries

characteristics of the good or service to be traded.

- Informed parties: used-car sellers, insurance buyers, workers;

- Uninformed parties: used-car buyers, insurance companies, employers;

adverse selection moral

There are two forms of information asymmetries: and

hazard. occurs when the informed party is more willing to trade when the

Adverse selection

trading is less advantageous to a uniformed trading partner. Therefore, it results in a

market failure for high-quality products, because the uniformed party will

rationally lower his/her willingness to pay even further, so sellers of effectively high-

quality good will not be willing to sell at such low price.

occurs in settings with adverse selection when the

Market unravelling

 presence of unattractive trading partners drives attractive one out of the

market by altering the prices at which they can trade.





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5 mesi fa

Corso di laurea: Corso di laurea in economics and management (corso in inglese)
A.A.: 2017-2018

I contenuti di questa pagina costituiscono rielaborazioni personali del Publisher beatrice_fontana di informazioni apprese con la frequenza delle lezioni di Introduction to the Modern Firm 2 e studio autonomo di eventuali libri di riferimento in preparazione dell'esame finale o della tesi. Non devono intendersi come materiale ufficiale dell'università Ca' Foscari Venezia - Unive o del prof Warglien Massimo.

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