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Economics - MARKET FAILURE PEARSON AS LEVEL
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- 5. • Infinite wants& needs and finite resources. • Role of market is to allocate scarceresources. Remember!
- 6. MarketFailsintwoways: • Markets maylead to production of too many or too few goods (PartialMarketFailure) • Markets may not exist (Missing Markets), leading to no production of a good or service (CompleteMarketFailure)
- 7. • Externalities • Under-ProvisionofPublicGoods •InformationGaps • MoralHazard • SpeculationandMarketBubbles Sources/TypesofMarket Failure
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- 13. Externalities(SpilloverEffect) A cost orbenefit caused by an economic actor that is not suffered orenjoyedbythatsameactor .
- 14. Types of Costs 01.02. PrivateCosts Costofanactivityto anindividual economicunitsuchas consumerorfirm. ExternalCosts Spillovereffectsof consumptionor production-theyaffect thirdpartiesinanegative way. 03. SocialCosts Thecostsofanactivity notjusttotheindividual economicthatcreates thecostbuttotherestof society. SocialCost=Private Costs+ExternalCosts
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- 18. Spend $100/month Private Costs Discomfortand health risk that a third party might exposed as a result of inhaling cigarette External Cost
- 19. Private Costs +External Cost = SOCIAL COST
- 21. Types of Benefit 01.02. PrivateBenefit Rewardsofanactivity toanindividual economicunitsuchas consumerorfirm. ExternalBenefit Spillovereffectsof consumptionor production-theyaffect thirdpartiesinapositive way. 03. SocialBenefit Thebenefitsofanactivity notjusttotheindividual economicthatcreates thecostbuttotherestof society. SocialBenefit=Private Benefit+External Benefit
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- 24. Notes • If socialcosts is greater than private costs, there will be a negative externalitiyorexternalcost. • If social benefit is greater than private benefit, a positive externality or externalbenefitissaidtobeexist.
- 25. ExternalitiesofProductionandConsumption ProductionExternalitiesarisewhenthesocialcostsofproductiondifferdrom theprivatecostsofproduction. • NegativeExternalitiesofProduction(NegativeProductionExternalities) • PositiveExternalitiesofProduction(PositiveProductionExternalities) •PositiveExternalitiesofConsumption(PositiveConsumptionExternalities) • NegativeExternalitiesofConsumption(NegativeConsumption Externalities)
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- 31. Whatdoesitrelationwiththe market? • The greaterthe externality, the larger will be the difference between private costs and benefits and social costs and benefits. • The greatertheexternality, thegreaterthemarketfailureand thelessmarketpricesprovideaccuratesignals fortheoptimal allocationofresources.
- 32. Howcanyouknowthedifference betweensocialcostsandsocial benefits? • Use themarginal analysis. It focuses on small or incremental changesinaneconomicvariablesuchascostsoroutput. • Marginalcostsofproductionistheextracostsofproducingan extraunitofoutput. • Marginal benefit is the benefit recieved from consuming an extraunitofoutput.
- 33. • Marginal costsof production is likely to change as output increases. At first MC will fall because producing more canleadtogreaterefficiencies. • Then they start to rise because firm is having to pay higher prices to obtain more factors of production or production might be less efficient if a firm is operating beyond its optimum capacityofproduction.
- 34. • Marginal benefitof consumption of a productfallasconsumptionincreases. Eachextraunitofconsumptionbrings lessbenefittotheconsumer . • Marginal Benefit Curve = Demand Curvebecausethedemandcurvealso shows the value of the benefit put on the consuption of the product by a buyer .
- 35. • Quantity producedand consumed > OA,theextracostsofproduction>the extra benefit from consumption. Welfare would be improved by reducing production and consumption. This would lead to an inefficientallocationofresources. • If quantity produced and consumed < OA, then the marginal benefit > marginal cost. Welfare could be increased if production and consumptionwereincrease.
- 36. MSC = MarginalSocial Cost MPC = Marginal Private Cost MSB = Marginal Social Benefit MPB = Marginal Private Benefit Marginal Social and Private Costs and Benefits is the social and private costs and benefits of the last unit either produced or consumed.
- 37. MSC = MSB MPC= MPB Free Market determines by the supply and demand, so in free market the MPB = MSB = D. Remember the previous curve where the welfare is maximised when he MC = MB. In here, Production will take its maximum levels when MPC=MPB (OB) and socially, MSC=MSB (OA).
- 38. Market Equilibrium itselfoccurs when the marginal private cost = the marginal private benefit.
- 40. • Deadweight lossis a cost to society created by market inefficiency, which occurs when a supply and demand are out of equilibrium. • Total welfare loss is the sum of the vertical distances between the MSC curve and MSB curve between the output levels of OA and OB.
- 41. Read the page104 and explain it using your own words about the graphs in figure 4!
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- 44. TYPES OF GOODS Public Goods •Non-rivalry • Non-excludability Private Goods • Rivalry • Excludability
- 50. WHAT WILL MAKETHE MARKET FAIL? IF the provision of public goods left to the market mechanism, there would be a market failure.
- 51. FREE RIDER PROBLEM Someonewho receive benefits but allows other to pay for it. It can be solved by quasi-public or non pure public good
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- 56. where buyers orsellers or both lack information to make an informed decision. Imperfect Market
- 57. Occurs when theother oarty has more information than the other (assymmetric gap) that might exploit the gap. Information Gap
- 58. Reasons Overestimate the benefitor underestimate the benefit by buyers and sellers.
- 60. • Education • Pensions •Financial Services • Advertising Market Examples
- 61. 1.Make a groupof 4. 2.Read the book page 113. 3.Give the example about the market examples (2 market examples). 4.Use the PPT or any visual aid to help you present your ideas. Notes: The example should be different with the book and it should be real. Group Work
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- 63. Definition when an economicagent makes decision in their own best interest knowing that there are potential risk and if the problem result, the cost will be partly borne by other economic agents.
- 64. What will youdo if you know that Apple will replace your product if anything happen to your phone?
- 68. 2008 - SUBPRIMEMORTGAGE
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- 70. Speculation Definition Economic agents buysor sells something in the expectation of a future price change in the hope of generating a profit.
- 71. Market Bubble Definition Occurs whenrising demand, for whatever reason, drives prices beyond the level that might normally be expected.
- 76. Additional Information • Market failureoccurs when the price mechanism fails to account for all the costs and benefits necessary to provide and consume a good. • When the market simply does not supply products at all according to market demand then it is a complete market failure as well. • Partial market failure also occurs when the market produces either the wrong quantity or wrong price.
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- 78. GOVERNMENT INTERVENTION TO CORRECTMARKET FAILURE • INDIRECT TAXES • SUBSIDIES • MAXIMUM PRICES • MINIMUM PRICES • REGULATION • TRADE POLLUTION PERMITS • STATE PROVISION OF PUBLIC GOODS • PROVISION OF INFORMATION
- 79. Firms are releasingtoo much pollution into the atmosphere. What will happen? NEGATIVE EXTERNALITIES How government solve this problem?
- 80. How government solvethis problem? USING TAXES
- 82. Disadvantages: • Difficult totarget because the information failure of the exact size of the market failure or not knowing the impact a tax will have on the market. • Conflict decisions as tax is a revenue for government. • There might be a political opposition.
- 83. What if everyonestarts using the electric vehicle? POSITIVE EXTERNALITIES How government solve this problem?
- 85. Disadvantage: • Difficult totarget (same reason as the tax) • Conflict with other policy objectives as in someone need to pay the subsidies. • Can be difficult to remove especially for staple or basic foods/needs.
- 86. MAXIMUM PRICE Remember thatthe market failure also happen when there is a wrong price or quantity. Let's say, if there is a poor family that could not afford the staple food. What will happen?
- 87. MAXIMUM PRICE Staple food/Basicfood is going to have a positive externalities because this affect the children physical health and ability to function in society in the future.
- 88. This curve issimilar with the subsidies but has a different meaning.
- 89. MINIMUM PRICES And thereis other goods that cause negative externalities. To correct this, government need to raise the price by using minimum price.
- 91. It's easy tounderstand and relatively cheap to enforce. But this has several difficulties: • Government has difficulties to fix the right level of regulation to ensure efficiency. • Regulation tend not to discriminate between different costs of reducing externalities . REGULATION
- 92. Trade Pollution Permits Pollution Permitor Pollution Credit A permission issued, usually by a government, to allow a fixed amount of pollution to be created; this permit can be used by the owner or sold to another firm. It's a key element of cap and trade schemes (set a limit on a particular type of pollution, and then issue pollution permits to the total of that limit, which can be bought and sold between firms that pollute
- 94. STATE PROVISION OFPUBLIC GOODS Direct provision of public goods from the state. • It may lead to inefficient production, particularly if the government produces the good itself. • It may also be inefficient because the wrong mix of goods is produced, especially if the goods are provided free of charge to taxpayers.
- 95. PROVISION OF INFORMATION Governmentcan step in to provide the information itself, such as run advertising campaigns. Or it might force parties to a trasaction to release information
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- 98. Occurs when itintervenes in the market, but this intervention leads to a net loss of economic welfare rather than a gain. It arises when the total social costs arising from intervention are greater than the social benefits that are created by that intervention. DEFINITION
- 99. • Distortion ofPrice Signals • Unintended Consequences • Excessive Administrative Costs • Information Gaps • Conflicting Objectives • Politicians Maximising their Own Welfare TYPES
- 100. DISTORTION OF PRICE SIGNALS Sometypes of government intervention change price signals in the market.
- 101. Assignment Make a Posterabout this assignment. You should analyse: • The market failure • The government intervention • The government failure Industrialise d Country Trade War between countries School Zoning System Land Clearing for Palm Oil
- 102. Explain using adiagram, what will government do if all the restaurants use styrofoam and plastics for the take away order!