The first Fundamental Theorem of Welfare Economics (see above, Chapter 12) is meant to hold under relatively unrestrictive assumptions. One of these assumptions is that markets are ‘complete'. Markets are said to be complete when everything people value has a price at which it can be exchanged without transaction costs.
A so called ‘natural monopoly' arises when a producer faces high fixed costs and increasing returns to scale in the relevant range. If that is the case the average cost of production declines as the quantity produced increases, and it is always cheaper for one large company to supply the quantity demanded than many small firms.
Moral hazard refers to the incentives insurance and other similar contracts provide for the insurance buyer not to take every possible precaution in avoiding the payment of insurance claims.
An externality is a cost or benefit of a transaction on individuals who are not a party to the transaction. A producer sells his goods to customers at marginal costs. But his production technology involves pollution. Externalities can be positive or negative.
The economist Ronald Coase has shown that if there are well-defined property rights and trade in an externality is possible and there are no transaction costs, bargaining will lead to an efficient outcome regardless of the initial allocation of property rights.
Coase's reasoning thus depends on measuring social costs and benefits in terms of their consequences:
- on the welfare;
- of individuals;
- as measured by (actual) preference satisfaction;
- irrespective of distributional considerations.
Intellectual property comes in two main forms: patents and copyright. Patents provide the right to exclude others from making, using, selling and importing an invention for the term of the patent in exchange for making the invention public. A copyright gives the holder the exclusive ‘right to copy', which also includes the right to be credited for the work, to determine who may adapt the work to other forms, who may perform the work, who may financially benefit from it, and so on.
Locke argues that people can acquire property rights over land and other natural resources, subject to certain provisos, because they own themselves, thus have the right to preserve themselves, and they own the fruits of their labour. Further, by mixing their labour with a (previously unowned) physical thing they acquire ownership over that thing.
Locke argues that people can acquire property rights over land and other natural resources, subject to certain provisos, because they own themselves, thus have the right to preserve themselves, and they own the fruits of their labour. Further, by mixing their labour with a (previously unowned) physical thing they acquire ownership over that thing.