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. 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 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 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 o 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.