Market Failure
Monopoly
Public Goods
Merit & Demerit Goods
Externalities
Re-cap – Year 10 Economics
• Economics looks at how we fulfill peoples……
• The Economic problem is (W?H?W?)
The Economic problem
• Scarcity and limited resources
• People have infinite demands
• Society needs to determine how to produce
and distribute these relatively scarce
resources
• We could limit our demands; be satisfied with
the basic necessity's of life
• Society dominated by people wishing to
consume more goods and services than are
available
Market Failure - Welfare
• Welfare is a key concept in economics.
• The concept of welfare in economics relates to
people’s material wellbeing (i.e. access to
goods & services)
Market Failure
• Market Failure occurs when a free market fails
to maximise welfare.
• If the market is failing it is possible to increase
the welfare of more people.
• In Economics it is important to understand
how we use scarce resources to maximise
welfare.
Market Failure
A Market can Fail in three ways
1. It can over or under produce goods/services.
2. It can over or under price goods/service.
3. It can produce goods / services in an
inefficient way.
Market Failure - Examples
• In each of the following cases the market fails
•
•
•
•
Monopoly – A lack of Competition
Public Goods – Under production of some goods/services
Merit & Demerit Goods – We make bad choices
Externalities – We only consider ourselves
Market Failure
Part 1
Monopoly
An Absence of Competition
Which companies face little or no
competition?
Good Service? Bad Service?
Do you have an alternative?
Does more choice lead to a better deal
for customers?
Monopoly
• A ‘pure’ monopoly exists when one firm
supplies a specific good or service.
• A monopoly holds a dominant market
position.
• Economists are concerned with monopolies as
dominant firms ‘could’ abuse there position.
Task
• In pairs indentify three ways in which a
dominant firm may abuse its market position.
Monopoly – abuse of power
Monopolies can:
•
•
•
•
Increase Prices
Reduce Choice
Lower Quality of Goods & Services
Operate inefficiently
Task
• Using Page 206 in the textbook
explain
the key features of a monopoly in your own
words.
(Moynihan)
• Explain how each feature results in a loss of
welfare for consumers (or why the market
fails)5
Monopoly Power
A firm does not have to be the only firm to be
able to abuse its position.
A firm has Monopoly Power if it is able to
1. Increase the price
2. Restrict or control supply
Barriers to Entry
A firm will usually have some form of monopoly
power if the market has Barriers to Entry.
A Barrier is anything which potentially stops new
firms challenging the existing firms in an industry.
In your exercise books outline the natural and
artificial forms of Barriers to Entry Using pages 207 208 from the textbook.(moynihan)
Task
• For each of the companies given outline the
potential types of barriers to entry for each
industry
• List the markets in order from lowest to highest
barriers to entry i.e.:
1 = Highest impossible to overcome
6 = Lowest could be overcome
Homework – Assignment.
• Using the internet you will research and
produce a 500 word report on a firm which
has abused its monopoly power.
• You must find an example of how the firm was
able to abuse customers.
• You must say weather the firm was able to do
this because of the existence of barriers to
entry.
Market Failure
Part 2
Public Goods
Missing Markets / Under provision.
Who produces / provides the following
goods & services
…..what would happen to the production
C)
Would
No
provision
they
be……..
at
all!!!
Ifof
there
was
no
government
……
Overprovided
(i.e.
too
much)
B)A)Underprovided
(i.e.
not
enough)
the following goods & services?
Public Goods
• Public Goods are a specific type of good (or
service) which the free market system can
not adequately provide.
• Public Goods have certain characteristics
which result in the market being unable to
provide such goods. The price mechanism
cant function properly.
Public Goods - Characteristics
• Non – Rival; This means that if one person
consumes the good it doesn’t diminish the
quality or quantity of that good which is
available to others.
• Non-Excludable; This means that if one
person consumes the good other people can
not be stopped from enjoying the benefit of
that good.
Public Goods – The Problem
• Q. If you pay to consume a public good will I
also pay to consume it????
• Q. What happens as a result of this?
The Free Rider Problem
• Some people will choose not to pay for a
public good or service if they know that others
are willing to pay for it. They want to be a free
rider. But what if the other person is thinking
the same thing????
• The result is that nobody is willing to pay or
that private businesses can not profitably
produce the good.
Pure & Quasi Public Goods
• A Private Good
= Rival & Excludable
• A Pure Public Good
= Non-Rival & Non-Excludable
• A Quasi Public Good
= Has Some features of a public good
Private / Public / Quasi Public
Which Goods are Private and Which are Public?
Public Goods – Why the market fails?
• The free market either under provides or
completely fails to provide Public Goods. This
is a market failure.
Market Failure
Part 3
Merit & Demerit Goods
Making the wrong Choices
Starter Question
• Right now………
• How many of you…….
• Would rather be somewhere else?????
Reflection
• If you were to leave class now would this be a
short run or benefit or cost?
• How might your decision to repeatedly leave
the classroom benefit you in the long run?
• More importantly what would
the costs be?
Merit & Demerit Goods
• When we chose to consume certain goods we
don’t always make the right decision because
we don’t always see the bigger picture.
• We have imperfect information
Merit & Demerit Goods
• Merit Goods
• We under consume merit goods
• We underestimate the benefits &
overestimate the costs.
Merit & Demerit Goods
• Demerit Goods
• We over consume demerit goods
• We overestimate the benefits &
underestimate the costs.
Task
• On your own for decide whether each of the
following goods or services are merit or
demerit goods/services.
• Explain and give examples of the costs and
benefits which we either over or
underestimate.
Cigarettes
Loft Insulation
Public Library
Junk Food
Gym Membership
Task
• Complete Activities 3-5 on Page 73 in your
textbook (Horner)
Review - Complete the following
sentence
• Whilst right now I would rather nothing more
than to leave this economics classroom, I will
not leave because studying economics is
a_______ _________. I will study economics
because the long term _________ outweighs
the short term________.
I no longer have i_________ i__________.