A class compiled discussion presentation for MPH 1: Health Economics Module

1. Group Members
Adong Pamella
Oula Alex
Okalebo Charles
Wakooko Paul
Matovu JB

2. 1. From invisible to the visible
hand
2. Market failure
3. Causes of Market Failure

3.  Invisible hand:
The unobservable market force that helps the
demand and supply of goods in a free market
to reach equilibrium automatically
 It is a laissez-faire approach to economic
regulation

4.  Adam Smith: The Wealth of Nations
 If people were allowed to trade freely,
 Self interested traders present in the market
would compete with each other,
 Leading markets towards the positive output
with the help of an invisible hand.

5.  Visible Hand:
 Government’s intervention to regulate the
economy
 Stronger regulatory oversight of markets and
a bigger role for governments to counter
market swings

6.  Advanced economies with huge debt burdens
could be allowed to default as a self-
correcting mechanism to restore growth
BUT,
 Sharp collapse in employment and societal
pain is not a credible option for democratic
societies.

7. Defn
 Failure to make efficient use of scarce
resources to deliver allocative and
productive efficiency
Recap
 Productive inefficiency
 Allocative inefficiency

8. Productive inefficiency
 Firms not maximizing outputs from given
inputs
Allocative inefficiency
 Scarce resources not being used in a way
that maximizes consumer satisfaction

10.  A market failure occurs when the invisible
hand pushes in such a way that individual
decisions do not lead to socially desirable
outcomes.

11. 1. Incomplete markets/Missing Markets:
 Markets for some public goods are incomplete or
missing under perfect competition.
 The absence of markets is a cause of market
failure.

12. 2. Indivisibilities:
 In reality, goods and factors are not infinitely
divisible as defined by Pareto
 Indivisibility arises in the production of those
goods and services that are used jointly by
more than one person. Eg roads,

13. Pareto Optimality
 An economy is in a Pareto Optimal state
when no further changes in the economy can
make one person better off without at the
same time making another worse off.

16. 3. Common Property Resources:
 Common ownership when coupled with open
access,
 Would also lead to wasteful exploitation in which a
user ignores the effects of his action on others.
 Open access to the commonly owned resources:
crucial ingredient of waste and inefficiency. Eg Fish
in a lake

17. 4. Imperfect Markets:
 Pareto efficiency increases under perfect
competition. But it declines under market
distortions or imperfections.
 Monopoly distorts competition, increasing
the price of the product Eg. UMEME

18.  Asymmetric Information:
 In the real world, there is asymmetric (incomplete)
information.
 Ignorance and uncertainty on the part of buyers and
sellers.
 Thus they are unable to equate social and private
benefits and costs.”
 Eg. New device: Producer can’t estimate
Demand
 Consumer can’t ascertain quality and utility

19. 6. Externalities:
DEFN:
 Market imperfections where the market offers no
price for service or disservice.
 Are effects of a decision on a third party that is not
taken into account by the decision-maker.
 Externalities lead to malallocation of resources and
cause consumption or production to fall short of
Pareto optimality.

20. 2 Types of externalities
Positive externalities
The effect of a decision on others that is not taken
into account by the decision-maker is beneficial to
others. E.g.. Innovations
Negative Externalities
The effect of a decision on others is not taken into
account by the decision-maker is detrimental to the
third party.
Eg: Pollution from a cement factory

21. 7. Public Goods:
Defn: A public good is one whose consumption or use
by one individual does not reduce the amount
available for others.
 It is non-excludable if it can be consumed by
anyone.
 It is non-rivalrous if no one has an exclusive rights
over its consumption.
 When it is valued at market price, it leads to
market failure

22. 8.Public Bads
One person experiencing some disutility does not
diminish the disutility of another, such as air and
water pollution.
E.g. if someone congests the roads or pollutes the
air, there is not much one can do about it as an
individual

23.  www2.gsu.edu/~ecorlcx/Colander-ch15-
MarketFailure.ppt
 Tutor2u
THANK YOU