ECO - SAC 2 - Market failure

Types of market failure: public goods

• Are particular G+S that can be consumed collectively by an individual, without preventing others from accessing them and from which nobody is excluded from, even if they don’t pay

• Must Be NON rivalrous and NON excludable

• Non excludable

• those who dont have the money or choose not to pay cannot easily be refused that good, leads to free rider problem

• Non rivalrous

• Do not prevent others from buying/benefiting from the exact same item

Types of Market failure: NEG Externalities - defo/ consumption

• Cost paid or borne, by third parties arising from the production/consumption of G+S, leads to market failure as socially undesirable goods and services tend to be overproduced

• Consumption: the smoking of cigarettes in public, cause costs to third parties in the form of health issues

• places a burden on public hospitals and therefore, tax payers who foot the bill of consumption rather then tabaco companies.

• private benefits outweigh social benefits

Types of market failure: NEG externalities - Production

• coal fired power stations realise carbon dioxide emmisions into the atmosphere that lead to global warming.

• These costs are not paid by producers who have caused the damage, thereby distorting the efficient allocation of resources and causing socially undesirable G+S tp be overproduced

• social cost outweigh private costs. = overallocation

Types of market failure: positive externalities - Defo/ Consumption

• Benefits received by third parties that arise from the production/consumption of particular G+S.

• Market failure occurs from this as resources are not allocated efficiently or in sufficent quantity and our general wellbeing will be lower then it could be.

• If one pays for gaining an education to improve their knowledge/skills, others in society benefits

• social benefits outweigh private benefits = under allocation

Types of market failure: positive externalities - production

• if one person pays for a health vaccine, there are greater benefits for the wider community who also benefit despite not paying for the service.

• However due to the immense cost of these and little profitability it results in a under allocation of resources and underproduction of socially beneficial G+S

• private costs outweigh social costs = under allocation

types of market failure- Asymmetric information

• for markets to allocate resources effientely, buyers and sellers need to have complete and reliable knowledge of all relevant information affecting their economic decision.

• However, more often then not sellers have more info, so rational decisions abou allocation cannot be made. Market fails,

Types of market failure: misuse of common access resources

• including environment natural inputs, such as forest and wild fish.

• These goods are non excludable and free, however they are rivalrous, as resources are depletable.

• the portrayal of them being free causes improper price signals and information that leads to an efficient allocation of resources, instead their is market failure, and inefficient intertemporal efficiency,

The role and effect of gov policies to reduce externalities: indirect tax

• The federal government places taxes on tobacco and alcohol, these taxes raise the price, possibly changing consumer consumption thereby re-allocating resources more efficiently to areas that greater overall wellbeing

• reducing the health and safety cost’s that in turn are paided by taxpayers and the gov

The role and effect of gov policies to reduce externalities:

• cash subsidy (neg externalities)

• A gov cash subsidy could be used to encourage consumers of a product to change behaviour and reduce consumption of products that cause negative externalities

  eg. Cash to install solar panels.

The role and effect of gov policies to reduce externalities:

• gov laws to reduce neg externailities

• passing of laws or legislation to force firms and or consumers to change their actitivty/behaviour causing negative externalities.

• eg. passing clean energy act (carbon tax) compelling consumers producers to change their patterns.

The role and effect of gov policies to reduce externalities:

• cash subsidy (positive ext)

• if positive externalities lead to the underproduction of merit services that are deemed socially benefical (education), the gov can pay a subsidy to private producers to encourage consumers

The role and effect of gov policies to reduce externalities:

• directly provide socially desirable services reducing the problems of positive externalities

• reduce the market failure associated with positive externalities that leads to underproduction/consumption of socially benefical G+S, by granting all people access

• eg. building + operating public health system.

The role and effect of gov policies to reduce externalities:

• educational advertising to change behaviour and reduce externalities

• when consumers have complete knowledge of the impacts of their economic acitvities and consumption, negative externalities are less likely to occur.

• One approach is through an advirtising compaign to educate/inform public

The role and effect of gov policies to reduce public goods:

• improve provisions of public goods

• if left to the private sector socially beneficial public goods would be underproduced. As profits are low and unattractive.

• Gov policy can reduce this failure and increase effiency in resource allocation. With the main approach through using the annual budget to provide for these items, usally free of direct charge, as paid through tax revenue.

the role and effect of gov intevention on asymettric information:

• GOV LAWS REGARDING FULL PRODUCT DISCLOSURE:

• meaning all relevant information is displayed with no disclosure, allowing effective decision making, by potential buyers. Make it illegal for seller to withhold info.

the role and effect of gov intervention on asymmetric information:

• GOV INFORMATION ADVERTISING AND EDUCATIONAL COMPAGIN:

• advertising to educate and inform consumers of potential dangers of products, so that more effective choices can be made, and resources allocated effciently to maximise societal wellbeing

The role and effect of gov policies to reduce abuse of common access resources:

• protection of fish stocks on rivers and oceans as common access resources

• government laws about catch limits, size and permitted areas in order to protect fish stocks from illegal and unreported fishing. as overproduction of fishing decreases intertemporal.

The role and effect of gov policies to reduce abuse of common access resources:

• protection of climate as a common access resource

• Taken for granted, due to the strong impacts on the global economy, it has caused global warming and more severe weather events

• Aus has made various international commitments to reduce carbon emmisions like the paris agreement on climate change (reducing co2 emmisions)

The role and effect of gov policies to reduce abuse of common access resources:

• Gov policies to reduce climate change and protect common access resources for current and future consumption

• carbon tax: imposing a cost on businesses releasing Co2 instead of these becoming an external tax third parties pay

• Encouragement of renewable energy: through subsidies and tax concession to incentivize installation of clean renewable energy

• Joining international agreements to protect common access resources: such as the paris aggrement on climate change

One example of gov intervention that leads to decreased productive efficiency

• Despite good intentions, gov wage regulations unintentionally reduces productive efficiency in resource allocation.

• excessively high minimum wage discourages employment causing firms to let go/minimize workers and hence depressing incomes and purchasing powers.

• Decreasing productive efficiency as it leads to higher average cost of production and operation below capacity.

Market failure

• when market mechanism dosen’t allocate resources in a way were soiceys’s general wellbeing maximized.

• When this occurs gov often intervene with a range of policies designed to reduce market failure and improve how resources are used

Two gov policies to reduce asymmetric info market failure

• gov laws regarding full product disclosure

• Gov informative advertising and educational campaigns

5 Gov policies to reduce externalities

• laws to reduce negative externalities

• indirect taxes to reduce neg externalities

• reduce both negative and positive externalities using subsidies

• gov provide socially desirable service reducing the problem of positive externalities

• gov uses educational advertising to change behavior

Gov policies to reduce the abuse of common access resources

• protection of forests and marine areas as common access resources

• protection of fish stocks on rivers and oceans as common access resources

• protection of climate as common access resources and gov policies to reduce this