2.4 Market Failure
Reasons for Market Failure
 Positive Externalities
o Exist when the social marginal benefit from consumption of a good or
service exceeds the private marginal benefit, usually this exist because the
goods or services in the economy are under-consumed or information
under-provided
o The marginal social benefits of consuming the good > private marginal
benefits
 Examples of these could be merit goods, products under-consumed
do to information failure, which can include; art and sporting
participation, health cares, or education
 In the graph an example of positive externalities is being shown
from the consumption of education, when consumer benefits from
education productivity increase.
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Negative Externalities
o Exist when marginal social cost > private marginal cost or when marginal
social cost of production exceeds the private costs faced only by the
producer/supplier of the product
o These externalities can be in the form of:
 Pollution from cars and motorbikes
 Litter on streets and in public places
 Smoking and alcohol abuse that effect population
 Crimes such as vandalism, mis-treatment of animals etc
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Short Term and Long Term Environmental Concerns
o Consists of environmental concerns that effects the micro economy in the
present in a positive way but may hurt the economy as a whole in the
future, showing how little concern is given to the long term environmental
concerns
Sustainable Development
o A pattern of resource use that aims to meet the human needs while still
preserving the environment so that these needs can be met not only in the
present, but in the indefinite future
o Utilized as a way to save the economy from the short term or long term
environmental concerns that cause market failures
Lack of Public Goods
o Public goods are services which are clearly in demand, but which must be
provided collectively by the government in the economy Usually these
goods are not normally provided by the private sector in an economy
because of the free-ride problem.
o Examples: street lighting, national defense, and flood control system
o Market failure occurs with public goods because the private sector
producers will not supply public goods to people because they cannot be
sure of making an economic profit and this is due to the fact that
consumers can take a free ride without having to pay for the good or
service.
o The obvious solution is that these public goods are provided collectively
by the government, and then financed through taxation of individual
households and businesses.
Under provision of merit goods
o These type of good could be provided by the market but the consumers
may not be able to afford the goods or rather the consumers do not feel to
the need to purchase the good. So, when this happens the market would
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decide not to provide the merit goods in the quantities that society may
need despite consumers preference.
o Example: education(colleges, schools, universities, nurseries)
Overprovision of demerit goods
o These are good which society over produces or goods that the market
produces that are not in the best interest of the society as a whole but will
provide a surplus of profit for the economy as a whole.
o Examples include: tobacco, alcohol, gambling, etc.
Abuse of monopoly power
o When the firm in control of a sole product in the market creates higher
prices that lends higher profits, usually due to the lack of incentive to
innovate their products
Possible Government Responses
 Legislation
o Utilized to control activities causing externalities, to prevent firms from
giving inaccurate information, and to prevent the abuse of monopoly
power
 Direct Provision of Merit and Public Goods
o These provisions are financed through the tax system. Free or direct
provision means that if services are used equally by all, lower income
groups gain more advantage, reducing inequality in the goods.
o Examples: healthcare and education
 Taxation and Subsidies
o Utilized to correct externalities and correct for monopoly in the market
o This type of government intervention can vary the rate in the market
according to the size of the market distortion but there is also a lack of
knowledge or the market can become infeasible to the use of different tax
and subsidy rates.
 Tradable Permits
o Cost-efficient approach to reducing greenhouse gases, where the
government decides how many tons of a particular gas may be emitted
each year. Thus, given each firm a quota of greenhouses gases that the
firm can emit over a specified interval of time, then the market takes over.
 Extension of Property Rights
o the government extends the property rights so people or firms have more
incentive to care for something. This arises from the story of the “Tragedy
of the Commons”.
o Example: adopting a highway or privatizing a forest
 Advertising to encourage or discourage consumption
o These methods are used by the government in order to encourage or
discourage the public’s consumption of certain goods or services.
o Example: Using taxes to reduce the consumption of oil in the United
States
 International Cooperation among Governments
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The government can enact command-and control policies with foreign
nations through agreements.
o Example: The agreement signed in Rome on November 14, 2008, between
the MASHAV - The Center for International Cooperation of Israel’s
Ministry of Foreign Affairs and the Food and Agriculture Organization of
the United Nations (FAO)
MINI IA
http://www.cioupdate.com/features/article.php/3802586/Stimulus-Plan-Gets-Nod-fromTech.htm
This article explores government intervention with in the United States to
stimulate the technological factor of the economy by giving more money to businesses to
spread their computer network ranges and make their products less expensive. This
necessity for economic stimulus happens after market failure caused by positive
externalities or when a firm making a decision does not receive the full benefit of the
decision and as it does benefit firm it also less than makes a benefit on society. Here in
the article the externalities produce market failure because the technological products are
under-consumed by average American do to information failure of how to expand the
product range.
Basically the Senate and the House are expresses the need to pass a bill that will
take steps to enforce Net neutrality by putting stimulus grant money into the economy or
that the government will directly give to the firms. Net neutrality is “the idea that
networks should be open and transmit data in a non-discriminatory fashion”. The
definition of the term "open access," also being the provision in the bill that says the
businesses would be required carriers that also allow rival firms to run competing
networks on their infrastructure, a solution to market failure according to monopoly
power.