Market failures occur when the price system fails to allocate resources efficiently. There are four main types of market failure: lack of competition, externalities, public goods, and income inequality. Externalities happen when a transaction imposes costs or benefits on third parties. Negative externalities like pollution require government intervention through taxes or regulations. Public goods must be provided by the government because free-riders cannot be excluded from consuming them.
Market failures occur when the price system fails to allocate resources efficiently. There are four main types of market failure: lack of competition, externalities, public goods, and income inequality. Externalities happen when a transaction imposes costs or benefits on third parties. Negative externalities like pollution require government intervention through taxes or regulations. Public goods must be provided by the government because free-riders cannot be excluded from consuming them.
Market failures occur when the price system fails to allocate resources efficiently. There are four main types of market failure: lack of competition, externalities, public goods, and income inequality. Externalities happen when a transaction imposes costs or benefits on third parties. Negative externalities like pollution require government intervention through taxes or regulations. Public goods must be provided by the government because free-riders cannot be excluded from consuming them.
Market failures occur when the price system fails to allocate resources efficiently. There are four main types of market failure: lack of competition, externalities, public goods, and income inequality. Externalities happen when a transaction imposes costs or benefits on third parties. Negative externalities like pollution require government intervention through taxes or regulations. Public goods must be provided by the government because free-riders cannot be excluded from consuming them.
Download as PPTX, PDF, TXT or read online from Scribd
Download as pptx, pdf, or txt
You are on page 1/ 20
TOPIC 3
MARKET FAILURE MARKET FAILURE
• A situation in which the price system fails to
operate efficiently, creating a problem for society. • Four examples of market failure: – lack of competition – externalities – public goods – income inequality. MARKET FAILURE: LACK OF COMPETITION • Firms without competitors tend to restrict supply through collusion, which raises prices to maximise their profits. • leads to non-optimal allocation • Examples: – Visy and Amcor price fixing – Price fixing by Queensland’s fire protection industry. MARKET FAILURE: LACK OF COMPETITION EXTERNALITIES
• An externality is a cost or benefit imposed on
third parties (people other than the buyers and sellers of the good). • Externalities can be: – negative (harmful spillovers) – positive (beneficial spillovers). NEGATIVE EXTERNALITIES • Those that are detrimental to third parties: – a neighbour’s consumption of loud music may reduce your ability to study – noise pollution caused by aircraft – smoke from a factory.
• Approaches to solving these ‘failures’ include:
– taxes (e.g. pollution taxes) – regulations (to limit pollution). NEGATIVE EXTERNALITIES NEGATIVE EXTERNALITIES TAXING TRAFFIC • What external costs may be caused by traffic congestion? • How would a congestion charge address congestion? • How would drivers who pay the fees benefit from this program? • What criticisms could be made of congestion charges? • Can you think of any other remedies for congestion besides a congestion charge? A SUGAR TAX? A SUGAR TAX? A SUGAR TAX? • Food taxes intended to shift consumption towards a healthier diet are controversial. Some people think that individuals should make their own choices, and if they prefer unhealthy products, the government should not interfere. • In view of the fact that those who become ill will be cared for at some public expense, others argue that the government has a role in keeping people healthy. • Use this opportunity to apply an economists thinking to the issue. POSITIVE EXTERNALITIES • Externalities that are beneficial to third parties: – government expenditure in schooling benefits the whole of society, not just students – vaccinations provide a direct benefit to the patient and a spillover benefit to other people (less chance of contracting the disease. POSITIVE EXTERNALITIES
• Approaches to preventing market failure in
immunisation: – provide subsidies for attending school and being vaccinated against disease – by passing laws requiring all parents to immunise their children. POSITIVE EXTERNALITIES PUBLIC GOODS
• A good or service that the government, rather
than the market, must provide if it is to be made available in sufficient quantity. • It has two special properties once produced: 1. users collectively consume benefits 2. there is no way to prevent people who do not pay (free riders) from consuming the good or service. PUBLIC GOODS
• Public goods are paid for using tax revenues.
Why? • If public goods are made available only in the marketplace, people wait for someone else to pay and the result is an under-production or zero production of public goods: free-rider problem. PUBLIC GOODS
• Examples of public goods:
– the judicial system – street lighting – maritime navigation markers – quarantine service. PUBLIC GOODS • Networks TV signals are non-rival in consumption, that is, providing the signal to one household with a television does not prevent other households with televisions from watching the associated programs. • How have network TV stations managed to overcome this problem? INCOME INEQUALITY • Even if the market operates efficiently, an unequal distribution of income can still result. • Some disagreement on whether it is a market failure. • But there is widespread support for a policy of reducing income inequality.
