Microeconomics Lecture Outline
Lecture 9: Externality, Information, and Uncertainty
Externality
- Pecuniary v. Physical externality
- Market Failure due to market absence (lack of price mechanism)
- Producer to producer
- Producer to consumer
- Consumer to consumer
- Consumer to producer
- Optimality condition: MSB = MSC (Fig. 9-1)
- Remedy#1: Pigouvian taxation (Fig. 9-2)
- Remedy#2: Coasian bargaining (Fig. 9-3)
- Network externality (Fig. 9-4)
- Join the bandwagon:
- Language: Mandarin v. Taiwanese
- Computer system: Windows v. Unix
- Web auction platform: Yahoo v. eBay
- Cell phone: CHT v. FET
- Others: exam cheating, jay walking, traffic light, end-of-show applause
- Stand out alone: dressing, hair style, holiday.
Information Asymmetry
- The used-car market: lemon v. plum
| (Used car market) | Buyer value | Seller price |
| "Lemon" | 200 | 100 |
| "Plum" | 800 | 700 |
* Remedies: pre-sale mechanic check, used-car warranty (as signal)
- Adverse selection: pre-contract hidden info problem
- Social security
- National health insurance: mandatory risk-sharing
- Moral hazard: post-contract hidden action problem
- Unemployment insurance
- National health insurance: co-payment/deductibles
- Principal-agent problem: firm owners v. manager
- Signaling: education/degree (sheepskin effect)
Uncertainty
- Contingent (conditional) consumption: expected utility maximization
- Actuarially fair gamble (expected profit = 0)
- Risk-averse: concave utility
- Risk-loving: convex utility
- Risk-neutral: linear utility
- Investment diversification: (Modigliani, Nobel 1985)
- Stock A (umbrella) v. stock B (Swimwear)
| (Return) | Rain (prob 50%) | Shine (prob 50%) |
| A "umbrella" $100 | 200 | 50 |
| B "swimwear" $100 | 50 | 200 |
(1) Expected retuen from A or B: $125
(2) Diversification ($50 on A, $50 on B): sure return of $125
- 愛國獎券: 同號四聯 v. 四張不同號
- Risk spreading
- Stock market: the "random walk" theory
- Optimal tax evasion decision