The document discusses market failures and government interventions to address them. It provides examples of market failures such as pollution, traffic congestion, and underprovision of public goods. It also lists government policy tools like taxes, subsidies, and regulations that can be used to correct market failures and achieve more efficient resource allocation.

1. IB Economics Topic 2.4 Describe market failure and the government interventions to correct the market failure ISS International, Singapore Mr. Andrew McCarthy

2. Describe market failure and the government interventions to correct the market failure

3. Econ 2.4 Learning What are examples of market failure? What is a government Intervention? How, when and why does the government intervene in the market Notes and Readings… Pg 134 – 146 Course Companion Pg 327 – 337 Sloman

4. Market Failure can occur in a number of ways… Some products may be under produced or not at all. Thus resources are under allocated to their production Some good may be over produced . Thus resources are over allocated to their production. The production or consumption of some products affects third parties with spill overs, these social costs are not included in the private market price. Market failure implies a loss of allocative efficiency the potential total surplus in the market is not maximised A deadweight loss may exist

5. Market Failure Examples Pollution, air, water, soil Traffic congestion Deforestation and loss of biodiversity Health problems associated with consumption of tobacco, alcohol and illicit drugs Depleted fish stocks Global Warming

6. Examples of goods which the market fails to provide in adequate quantities Roading Health services Waste disposal Library services Education Train transport Affordable housing

7. What tools does the government use to solve these problems? Passive smoking Public transport Quality education Safety for cyclists Unequal income distribution Affordable medicine Obesity Drink driving Street lighting Recycling Cigarettes Carbon Emissions Range of Government Interventions

8. Positive Externality of Production MPC MSB MSC P$ Q Job training and education at work

9. Negative Externality of Production MSC MSB MPC P$ Q Nuclear Power Generation

10. Negative Externality of Consumption MSB MPB MSC P$ Q Alcohol Consumption

11. Positive Externality of Consumption MPB MSB MSC P$ Q Education at University

12. Graphing externalities

13. Roles of Government Legislative or Regulatory Role Allocative Role Distributive Role Stabilisation Role

14. Activity Several market failures are obvious in many developed countries. Affordable medicines – underprovided and overpriced by market Public transport – underprovided and overpriced by market Obesity and heart disease – negative externality on society You have a summary about “government measures to compensate for market failure”, and also a list of the effects. Task: for the three market failures listed above can you Suggest a suitable government intervention Analyse the effects of this intervention on the market. Explain the overall effect on allocative efficiency and DWL

15. Econ 3.3 Episode Two - Learning What are public and private goods? Why are public goods not normally provided by the market? Notes and Readings… Pg 124 – 125, 130 of Telfer Bible How does the state collectively provide public goods?

16. Types of Goods Private Goods Rival : one person consuming the good excludes other people from using the same good. Depletable: Once one person has used the good, the availability of the good decreases Excludable: a person who is not willing to purchase the good can be excluded from consuming it. Public Goods Non rival: many people can enjoy consuming the good and others are not excluded. Non-depletable: once one person has consumed the good, there is just as much still available as prior. Non – excludable: once the good is provided by the market there is no practical way of excluding others from consuming the good. Zero Marginal Cost

17. Collective Provision of Goods

18. What are two different options that DOC could use to reduce congestion? Impose User Pays Charges (I) Charging for facilities will remove the congestion (XD for facilities) as QD will fall, DWL will exist Building more facilities reduces congestion by making more facilities available and eliminates DWL. (E) Charging is a lower cost solution, earns a revenue, cheaper than building facilities, facilities use tax which could be used elsewhere Build more facilities (I) Building more facilities reduces congestion as it will increase the maximum capacity of National Parks, User Pays will ration facilities among users, Reduce Qd, eliminate consumers who won’t pay. (E) More facilities eliminates DWL’s as maximum capacity will increase to where SMB = 0 User pays earns Government an income, income can be used to improve facilities. Building more facilities (provided it shifts max capacity to QS1 on GRAPH 1) will remove congestion (XD) but it also removes the DWL area whereas user pays create a DWL.

19. Common examples of Market Failure

20. Econ 3.3 Episode Three - Learning What are spillover costs and benefits? How do externalities relate to consumption or production? Notes and Readings… Pg 102 – 106 of Telfar Bible How does government intervene to reach a desired social equilibrium?

21. Examples of Market Failures and Government Intervention Use summary handouts for ideas, practise Q4, 2005 exam Situation Example Intervention People on low incomes cant afford what is seen as a merit good Visits to the doctor Subsidise visits to the doctor for those on low incomes. Production of a good results in significant negative spillover costs ? ? A demerit good is popular in the marketplace ? ? A privately produced product results in significant benefits for third parties in the local region. ? ? Consumption of a good generates spillover benefits for other consumers ? ?

22. In recent years, a number of movies have been filmed in New Zealand, including The Lord of the Rings trilogy, The Last Samurai and Whale Rider . Give THREE examples of a positive externality of production that may arise from the filming of movies in New Zealand. Draw and appropriately label a new curve that shows the effect of positive externalities of production. Label the social equilibrium quantity QS and the social equilibrium price PS Identify and label the per unit subsidy that would be needed to internalise the positive externality. SMC QS PS subsidy Market will privately over price and under provide the product. Subsidy will reduce price paid and increase QS to a socially desirable level.

23. Critically analyse the effect of a government subsidy to movie producers by completing the questions below…. Describe a positive effect of a subsidy to movie producers on resource allocation. Describe a negative effect of a subsidy to movie producers on resource allocation. Draw an overall conclusion on the effectiveness of a subsidy to movie producers as a policy to improve resource allocation. SMC QS PS subsidy

24. Critically analyse the effect of a government subsidy to movie producers… Describe a positive effect of a subsidy to movie producers on resource allocation. The subsidy raises the revenue received or decreases costs for New Zealand film producers. Provides them with an incentive to increase local production to a more socially desirable level. Allocates more resources to the motion picture industry in New Zealand. Describe a negative effect of a subsidy to movie producers on resource allocation. There is an opportunity cost in government not spending on other government services, eg health, education, welfare. May encourage movie producers to become inefficient. May result in exploitation of natural resources. Draw an overall conclusion on the effectiveness of a subsidy to movie producers as a policy to improve resource allocation.

25. Property Rights Property is an asset that is either tangible (water, land) or is intangible (copyright to a song, patent to an idea) The government establishes property rights to ensure protection of assets and thus provides the foundation of a capitalist / market based society. The owners of property have property rights which means they can Use property in any way so that is doesn’t diminish the well being of others Derive an income from using property, lease or rent Sell, dispose or trade the property If there are no property rights on resources; consumers or producers will exploit them and sometimes generate a negative externality. Air pollution, water pollution, over use of depletable resources. Building a new house on a small section, shading, views?

26. Property Rights (cont.) Property Rights can reduce negative externalities of production No property rights , free fishing no limits Over fishing generates negative externality of production, fish stocks declining, unsustainable No one owns the fish so who cares? Government establishes property rights , fishing quota purchased, allocated to fishing companies. Catch limits - sustainability “ Internalising the externality”

27. Property Rights of a public good Describe what type of good fresh water is in NZ using the three criteria, excludable, rival and depletable. What type of externality exists in the market for fresh water in NZ? What are “water rights”? Suppose that each person is allocated water rights. How could the trading of water rights occur between people/firms, and what is the purpose? Explain why not establishing water rights in the past has resulted in market failure?

28. Negative Externality of Consumption - Tax Burdens MSB MPB MSC P$ Q Alcohol Consumption Very elastic demand, inelastic supply MSC + tax

29. Tax Burdens and Elasticities Consumer / Producer Surplus

30. Practice Question – Pg 146 Explain the concept of negative externalities of production. Hints Define what negative externality means Provide an example related to production What are the spill over / externalities that may be caused by some producers. Draw a graph to show the difference between the social and private equilibriums

31. Practice Question – 2008 Exam