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Economics Demystified: Market Failure - Equity or Opportunity?



Shane Vallance, South West RDA / Economy Module, delivers a presentation on the economics of intervening as a result of market failure.

Shane Vallance, South West RDA / Economy Module, delivers a presentation on the economics of intervening as a result of market failure.



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  • We look at the different viewpoints about why and how the public sector should intervene in the economy.
  • Profit is the oil that drives the engine. Does optimisation of utility drive your behaviour? Non powerful – no single actor (consumer or producer) can influence the market. Perfect entry & exit – firms can switch resources from one product to another. Externalities – will return to that later but costs equals individual and society benefits.
  • In essence – supply and demand.
  • 1 & 2 signify the arguments for no public sector intervention. 3, 4 & 5 present arguments for intervention.
  • Government has attempted to ‘internalise the market’ in parts of the public sector such as health and parts of education. The long term implications are obviously what’s been focused upon by the Government – not just an ideological argument but also elements of the productivity argument – by cutting less productive elements of the economy then they hope to drive growth.
  • Public sector variability connected to difficulties of measurement. However, consistent theme is that it has lagged the rest of the economy (remembering that the whole economy already includes the public sector measurement – meaning that the private sector element will tend to be higher than the red line. It will be interesting to see what happens to public sector productivity during the job losses (normally productivity measurements improve when inputs (people) are cut).
  • Rise in inputs over the last 10 years (particularly early part of the decade) represents the expansion in public sector employment – as well as financial inputs.
  • ‘Crowding out’ also refers to use of resources (reference Philip Green Review?). Review of construction contracts show that public sector tends to pay more for contracts than private sector clients. Why is that – less pressure on margins and a lack of ‘profit as the incentive’.
  • What we’re presenting here is our view of what BIS and HM Treasury will look for when public sector projects are being asked for approval. It is their view of the world and that is only being reinforced from the Coalition Government’s point of view – “private sector growth” – important for your potential role in putting forward projects for LEPs/regional growth fund etc.
  • This could also encapsulate the high costs of information – effectively acting as a barrier to entry
  • Interesting debate about air travel – whether the taxation should go on the producer (the air company) or the consumer (the air traveller)
  • Market failure 4 & 5 have the similar outcome – one is production focused and the other is consumption focused, both result in over use of resources which causes a negative externality to wider society and therefore Government needs to intervene, effectively distorting the market price to reflect this externality.
  • Do non-perfectly performing markets operate more effectively than public sector – depends on your view of externalities

Economics Demystified: Market Failure - Equity or Opportunity? Economics Demystified: Market Failure - Equity or Opportunity? Presentation Transcript