Market Failure - Year 12 Economics

Holiday Work • Over the holiday I would like you to get examples of demerit or merit goods…. Take photos of examples… maybe films….

• • • •

Pick one….. Ideas for reducing consumption of demerit goods Or increasing consumption of merit goods Or this could be positive and negative externalities.

Introduction to Market Failure Изъяны Рынка

Внешние Эффекты и рыночная эффективность

Market Failure рыночная неэффективность Definition: Where the market mechanism fails to allocate resources efficiently

Market Failure • Social Efficiency = where external costs and benefits затраты и выгоды are accounted for • Allocative Efficiency = where society produces goods and services at minimum cost that are wanted by consumers WHO GETS THE GOODS • Technical Efficiency = production of goods and services using the minimum amount of resources WITH WHAT ARE GOODS PRODUCED • Productive Efficiency = production of goods and services at lowest factor cost HOW ARE THE GOODS PRODUCED

Or put simply • Markets can function inequitably

• Markets can function inefficiently

Market Failure Market Failure occurs where: • Imperfect Competition • Несовершенная Конкуренция • Externalities • Внешние Эффекты • Incomplete Information • Неполная Информация

Market Failure Market Power: • Monopolies and oligopolies • Collusion • Price fixing • Supernormal profits • Barriers to entry

Imperfect Knowledge: Asymmetry of Information • Consumers do not have adequate technical knowledge • Advertising can mislead or mis-inform • Decisions often based on past experience rather than future knowledge

Market Failure Goods/Services are Differentiated • Branding • Designer labels - they cost three times as much but are they three times the quality? • Labelling and product information

Which one is the ‘quality’ item and why?

Private Goods • i.e. goods that can be identified as your possession. • You have ‘Property Rights’ права собственности over that good. • It is therefore ‘excludable’ i.e. you can prevent other people from using it.

Tragedy of the Commons Трагедия общих земель • Because it is difficult to establish property rights there is the likelihood that this resource will be overused and destroyed.

Overfishing

Rubbish Island in Pacific

The Great Pacific Garbage Patch

ARAL SEA

1973

1986

2001

2004

Market Failure Public Goods • Markets would not provide such goods and services at all! e.g. police, street lighting,

A non- excludable good?

Non- excludability неисключительность • Person paying for the benefit cannot prevent anyone else from also benefiting - the ‘free rider безбилетники problem’

Would you pay for this?

Merit Goods & Demerit Goods • Consumption of merit goods gives social benefits or imposes social costs.

• In groups of two, think of examples of each and why….

Merit Goods • nurseries, • schools, • colleges, • universities could all be provided by the market but would everyone be able to afford them? Schools: Would you pay if the state did not provide them?

Demerit Goods De-Merit Goods Society suffers from the consumption of these goods. • Goods and services provided by the market which are not in our best interests! examples Tobacco and alcohol Drugs Gambling

De-merit goods • Merit goods are ‘good’ for you. De-merit goods are thought to be ‘bad’ for you

"Smoking may become a reason of long and painful death".

"Smoking causes drug addiction"

"Smoking

during pregnancy causes harm to your child".

"Smoking causes impotence".

Activity 5 minutes • How can a government limit the consumption of demerit goods? • How can the consumption of merit goods be encouraged? • Think of as many ways.

Market Failure External Costs and Benefits External or social costs • The cost of an economic decision to a third party External benefits • The benefits to a third party as a result of a decision by another party

Market Failure External Costs • • • •

e.g. Pollution traffic congestion, environmental degradation depletion of the ozone layer

One ton of industrial wastes per resident in Pavlodar oblast • Tengri News March 2013

Marginal Social Cost

Price

+ Marginal Private Cost Marginal Private Cost

P2 Pe

Negative Externality

P1 Marginal Benefit = D

0

Quantity

Marginal Social Cost

Price

+ Marginal Private Cost Marginal Private Cost

P2 Pe

Negative Externality

P1 Marginal Benefit = D

0

Quantity

Marginal Cost Curve • Marginal cost curves are U shaped. • The cost of producing the extra item is considered to fall at first • then it will rise • This is because of economies and then diseconomies of scale

Marginal Benefit Curve • Downward sloping • I.e. the benefit from consuming the extra unit of output will decline • I.e. the value the consumer puts on the extra good will fall and the quantity increases.

Внешние Эффекты Производство Price

оптимум

MSC + MPC

Предложение (частные издержки) £12 Издержки загрязнения

£7 £5

Socially efficient output is where MSC = MSB

Cпрос частная ценность

80

100

Quantity Bought and Sold

Market Failure External benefits • by products of production and decision making that raise the welfare of a third party

External Benefits Price MSC

Value of the positive externality (Welfare Loss)

$10

$6.50 $5

Social Benefits

MSB

Socially efficient output is where MSC = MSB

MPB 100

140

Quantity Bought and Sold

Market Failure Measures to Correct Market Failure • • • • • • • •

State Provision Extension of property rights Taxation Subsidies Regulation Prohibition Positive Discrimination Redistribution of Income

Homework • Gyms and sports halls are merit goods…. With the help of an appropriate diagram, explain why merit goods are often underprovided. • (8 marks) • or • With the help of an appropriate diagram, explain how taxation can reduce the negative externalities (pollution) caused by factories. • (8 marks)