An

Assignment
On
Meaning and types of market efficiency, Market
failure, Public goods, meaning and types of
externalities, Market and non-market vauation
methods of natural resources
Course No.: Ag. Econ.- 514
Course Title: Natural Resource and Environmental
Economics

SUBMITTED TO

DR. R. R. PATEL

Assistant Research Scientist,

S.D.A.U., Adiya.

SUBMITTED BY

PATEL PARUL MUKESHBHAI

Degree - M. Sc. (Agril. Econ.)

Reg. No. – 04-AGRMA – 01804-2018

C.P.C.A., S.D.A.U.
Market efficiency
 Efficiency of the market is measured as output- input ratio.
 It should be greater than one.
E = O/I
Types of market efficiency
1) Allocative efficiency :
This is a type of efficiency in which economy/producers produce only that
type of goods and services which are more desirable in the society and also
in high demand. According to the formula the point of allocative efficiency
is a point where price is equal to Marginal cost (P=MC).
2) Productive efficiency (also technical efficiency):
 Occurs when the economy is utilizing all of its resources efficiently,
producing most output from least input. The concept is illustrated on a
production possibility frontier (PPF). In long-run equilibrium for perfectly
competitive markets, the average (total) cost curve i.e. where MC = A(T)C.
 Productive efficiency requires that all firms operate using best-practice
technological and managerial processes. By improving these processes, an
economy or business can extend its production possibility frontier outward
and increase efficiency further.
3) Economic efficiency:
 Economic efficiency occurs at the level of output at which the marginal
social benefits (MSB) equal the marginal social costs (MSC). MSB = MSC
Market efficiency levels
1. Weak-form efficiency:
 Prices of the securities instantly and fully reflect all information of the past
prices. This means future price movements cannot be predicted by using past
prices.
 2. Semi-strong efficiency:
 Asset prices fully reflect all of the publicly available information. Therefore,
only investors with additional inside information could have advantage on
the market.
3. Strong-form efficiency:
 Asset prices fully reflect all of the public and inside information available.
Therefore, no one can have advantage on the market in predicting prices
since there is no data that would
Market failure:
 Market failure is a concept within economic theory wherein the allocation of
goods and services by a free market is not efficient.
 That is, there exists another conceivable outcome where a market participant
may be made better-off without making someone else
Market power, Monopoly, Monopsony, Oligopoly, and Oligopsony
 The inefficiency in the market lead to imperfect competition and causes
market failure. Agents in a market can gain market power, allowing them to
block other mutually beneficial gains from trades from occurring. This can
lead to inefficiency due to imperfect competition, which can take many
different forms, such as monopolies, cartels, or monopolistic competition, if
the agent does not implement perfect price discrimination. In a monopoly,
the market equilibrium will no longer be Pareto optimal.
 The monopoly will use its market power to restrict output below the quantity
at which the marginal social benefit is equal to the marginal social cost of
the last unit produced, so as to keep prices and profits high.
Public goods
 Some markets can fail due to the nature of certain goods, or the nature of
their exchange. For instance, goods can display the attributes of public
 goods or commonpool resources, while markets may have significant
transaction costs or informational asymmetry.
 In general, all of these situations can produce inefficiency, and a resulting
market failure.
 This can cause underinvestment, such as where a researcher cannot capture
enough of the benefits from success to make the research effort worthwhile.
Property right as right of control
 This is the underlying cause of market failure. A market is an institution in
which individuals or firms exchange not just commodities, but the rights to
use them in particular ways for particular amounts of time. Markets are
institutions which organize the exchange of control of commodities, where
the nature of the control is defined by the property rights attached to the
commodities.
This falls into two generalized rights – excludability and transferability:
a) Excludability:
 Deals with the ability of agents to control who uses their commodity, and for
how long – and the related costs associated with doing so.
b) Transferability:
 It reflects the right of agents to transfer the rights of use from one agent to
another, for instance by selling or leasing a commodity, and the costs
associated with doing so. If a given system of rights does not fully guarantee
these at minimal (or no) cost, then the resulting distribution can be
inefficient.
Externalities:
 The allocation of resources to productive uses results from consumers and
producers making decisions with the aim of maximizing satisfaction and
profits, respectively.
  Private costs and benefits are taken into account in deciding purchases and
organizing production. Social costs and benefits include the costs and
benefits of consumer and producer but also costs borne by those who are not
participating in that particular market. These are known as external costs and
benefits or externalities.
 External costs and benefits can arise through both consumption and
production. From a sustainable development perspective, external costs are
most significant and arguably account for the failure of individuals,
communities and nations to follow a sustainable path.
Externalities types:
1) Negative Externalities: When economic agents not directly involved,
negative externalities can exist, such as pollution.
2) Positive Externalities: Positive externalities in production means that social
cost is less than private cost, and more of the good should be produced than
will occur in a free market.

Efficient market: A market is said to be efficient if marginal price and marginal

cost are equal. If not then a market is failure.
External costs: External cost shows the negative effects of a externality. i e
pollution of industry.
External benefits: This shows the positive or beneficial effects of a externality.
For example, the industry supplying smallpox vaccinations is assumed to be selling
in a competitive market.
Market and non market valuation of natural resources
 The economic value of natural resources can be estimated by the price
individuals will pay in order to obtain the benefits of the resources. The non-
 market values of that communities attach to natural resources, such as
recreational, existence and protection values.
 To support efficient decision making, environmental valuation techniques
are needed to quantify the value impacts resulting from changed catchment
management. Several approaches to environmental valuation are there i.e.
revealed preference techniques include travel cost and hedonic pricing
methods, stated preference techniques include contingent valuation and
choice experiments. Stated preference techniques are increasingly being
used to estimate non-market values.
 Nonmarket valuation is a method to estimate the value of goods and services
that are not commonly bought and sold in markets
 Non-market valuation is a sub-field within environmental economics that
deals with theoretical and practical aspects of estimating monetary values on
non-marketed environmental goods and services. Specifically, techniques
include the travel cost method of recreational demand, the hedonic property
pricing model, averting behavior analysis, contingent valuation, contingent
rating/ranking, and stated choice experiments.
Benefit-cost analysis
 Benefit-cost analysis is a systematic method that compares the accumulative
social benefits with the opportunity costs. Benefit-cost analysis can be more
difficult to apply when the benefits or cost do not have a market value.
Travel Cost Model
 The travel cost model estimates the implicit price of natural resources based
on outlays of time and travel expenses. An evaluation of these costs incurred
in using a natural resource (e.g. a state park) can be used to estimate the
regional demand for the resource.
  The aggregate value of the resource can then be inferred from a combination
of this demand and the number of visits to the site over time. This model can
be applied to many recreational activities that utilize the more intangible
natural resources such as bird watching.
Random Utility Models
 The random utility model is similar to the travel cost model except that
rather than focusing on the number and overall costs of trips to different
sites, it estimates the value individuals place on particular sites based on the
attributes of the site.
Hedonic Pricing Methods
 Hedonic pricing methods involve a comparison of specific sites that differ
only by some environmental attribute such as proximity to a forested area or
availability of a view. Comparison of the property value between two house
sites provides an indication of the value to the individual paying a higher
price for the site with the preferred attribute.
Contingent Valuation Method
 The contingent valuation method is a survey- or questionnaire-based
approach to estimating the value of non-market goods. This is the primary
method used for placing value on resources that cannot be valued by the
indirect methods. This is the only method that can be used to estimate
"existence values".
 Existence value: This is the value that individuals place on natural resources
that they want to remain unaltered, even though they may not use or visit the
area.
 Economic value: It is one ways to measure the value of a resource.
Economic values are useful to consider when making economic choices –
tradeoffs in allocating resources. Measures of economic value are based on
individual preferences