Page 354 - DECO401_MICROECONOMIC_THEORY_ENGLISH

Unit-23: Market Failure: Meaning and Sources

The cost of catch rises in decreased rate until ON boats not put up. After this, if extra boat is used then Notes
it shows a decreased rate. Socially, Maximum Level comes when OS boat is used.

When OS boat is used then
T slope of curve = V slope of curve

How is it? Using old technique, the slope of curve V is equal to slope of curve V. It means that marginal
profit (represented by V slope of curve as additional catch) is equal to marginal cost (represented by T
slope of curve as using additional boat) means by using OS boat, Marginal Benefits = Marginal Cost.
Note that t line is tangent to the V curve and is parallel to the T line
In an independent market economy, the industrialist will stop at point T in fishing? The answer is NO. The
reason behind this, they feel that the cost of operating an additional boat is less than expected revenue.
With old technique, fishing will continue till E until OK boats run and with new technique it will continue
1
till E until OA boats run. Every new entrant puts his catch or average product equal to cost of operating
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an additional boat. But the tragedy is that he does not check his social cost in this industry. The social cost
which he is missing is the loss of catch which is given to other fishermen. The reason behind this is the
common property fishing is exploiting by E until OA boats are used till the production occurs ahead from
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negative marginal returns. Thus the level of production (number of boats) will high in common property
factor because new entrants will not consider that loss which has given to existing fishermen.
This problem is related to all the fishery ground until the government makes a regulation in fishery.
How can Over-exploitation of CPR be avoided?—The CPR can be avoided or prevented by two
methods.
The first suggestion is Optimum Level of Use and to restrict that level by control. It generally occurs on
those conditions like hunting licenses, fishing quota etc. But there are some problems in this suggestion.
However, the quantity of fishing can be restricted in sea but there is high cost include in it. If we see the
international cases on quota violations then it is very high where these violations are happened after fixing
the quota.
Second suggestion is to clarify the property rights and should make as exclusive. One CPR is rival to
nature, if there is exclusive property right occurs then it means that CPR has both the characteristics of
normal goods (i) Non-excludable and (ii) Rivalry. It would perfect the factors distribution in independent
market situation.
But the perfection and equity has always rival. Generally in common land situation, common property
rights is used to improve equity and it is definite in the cost of perfection.
The new question is that what is important–equity or perfection? The second suggestion can use after
selecting from this.
(ii) Public Goods and Market Failure
The public goods or ‘Collective Consumption Goods’ is a main reason for market failure.
The public goods have characteristics of non-rivalry and non-excludability. The examples are security
services, law and administration services etc. For these services, no matter who is paying for this but it
is available for everyone. So these services are non-excludable. Thus the consumption of these services
by one does not affect the consumption of others.
The non - rivalry virtue of public goods market can not be allocated efficiently in the plant system (in
this case because the private benefits and private costs society / community get more social benefits).
Therefore these objects are provided by the government and managing sources of finance.

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