Sunday, October 5, 2014

Market Failure - 7 Tragedy of the Commons & Asymmetric Information

Tragedy of the Commons - Resources

- a term introduced by Garrett Hardin that refers to users of a commons ( a common pool, for example a pasture) where in his original analysis the process inevitably leads to the destruction of the resource (for example, overgrazing of the pasture) on which users depends.

Garrett Hardin video
Common-access resources (common pool resources) share two characteristics
  • It is difficult to exclude individuals from deriving benefits from the good or the resource.
  • There is rivalry in the consumption of common-access resources (one individuals consumption subtracts from the benefits available to others using the resource).
The effects of the Tragedy of the Commons behavior may be illustrated using a negative externality diagram. Where MSC > MPC.

Tragedy of the Commons, examples
Tragedy of the Commons and the Pilgrims

Solutions to Tragedy of the Commons

Private property rights - Government Taxes - Regulation

Of the four released AP exams and the last ten years of FRQ's I have found no questions on Tragedy of the Commons. If anyone knows anything different, please drop me a line.

Asymmetric Information

When either the buyer or the seller possess incomplete or inaccurate information.
Asymmetric Information leads to the following:

  • Adverse Selection - often one party knows more about a good than another, often, the seller knows more about the good being sold than the buyer.
Implications of costly information - Morgan Rose
Adverse Selection - Reading at amos web - nice examples

  • Moral Hazard -  people will take risks, when others will assume the consequences of those actions.

video - by Texas Enterprise

Video, Fraser institute 2011 student contest

Again, no questions found but I would suspect some questions pertaining to concept, about Asymmetric Information.

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