SYMBOLIC SYSTEMS 150:
Computers and Social Decisions (3 units)
Spring Quarter 2001-2002, Stanford University
Instructor: Todd Davies
Market Failure and the Internet (5/22&29/02)
Efficiency versus equity
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Efficiency refers to the total level of output or benefit produced
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Equity refers to how outputs or benefits are distributed among people
Conditions for perfect market efficiency - Pareto optimality; the
two fundamental theorems of welfare economics as a formalization of Adam
Smith's "invisible hand"; importance of "lump-sum" transfers
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Private goods - rivalness and excludability
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No external costs or benefits ("externalities")
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Perfect competition - no market manipulation, perfect factor mobility
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Perfect information - no asymmetries
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No time lags - market responds instantly to changes in supply and demand
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No transaction costs
Causes of market failures of efficiency - following Steiner, 1977,
and Stevens, 1993
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Public goods - e.g. parks (note mutability), broadcast media, libraries,
roads; market output will be inefficient if exclusion costs are high, consumption
is nonrival
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Externalities - e.g. pollution - negative; schools - positive
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Imperfect competition - monopolies and oligopolies, barriers to entry,
barriers to mobility
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Imperfect information - e.g. faulty products
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Time lags - e.g. unmet demand
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Transaction costs - search for information and buyers, sellers; negotiation
costs; monitoring costs
Equity theories
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Libertarian - voluntary transfers only as long as property "justly acquired"
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Utilitarian - maximize total utility across individuals
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Rawlsian - the "maximin" rule
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Egalitarian - equal outcomes for all
Market failures of equity
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rule by force and power - redressed through rights
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poor choices of individuals (e.g. nutrition, education)
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unequal starting points
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unequal outcomes - e.g. "winner take all" markets
Questions for discussion:
(1) How does the Internet affect all of this?
(2) What is the solution to market failure?
(3) What are the problems with this solution, and how does the Internet
affect the prospects for addressing these problems?
(4) What effect does the dimension of voluntary versus coerced participation
have on social decision procedures?
Return to SSP
150 syllabus