IB Economics HL: Examples on Market Failure and Government Intervention

Tax Example:

In 2009, USA, there was a taxation on cigarettes by $0.62 per pack. The following effects were a short term decrease in quantity consumed by an amount of between 9.7 to 13.3 percent decrease.

Subsidy Example:

In the USA, total farm subsidies in 2014 and 2015 were around $10 billion a year. Recently taxpayers sent $123.2 billion to farmers between 2018 and 2022.

Price Ceiling Example:

In 2019, the average out-of-pocket cost was 58$ per insulin fill, and patients with private insurance or Medicare paid approximately 63$ per fill(Each fill lasting 30 days). February, 2023 Eli Lilly, the largest manufacturer of insulin in the United States, announced that they will be lowering the cost of Insulin by 70%, and capping out-of-pocket payments for insulin at 35$.

Price Flooring Example:

Being revised in Brazil from 01 January 2024 to January 08, 2024, the minimum wage has increased from R$1,320.00 to R$1,412.00 per month.

Positive Externality of Consumption Example:

In December 2023 the COVID-19 vaccine was too low with only 17% of adults receiving the vaccine. With 7 million fewer adults not receiving the vaccine per year this percentage will keep decreasing causing people at risk to be more liable to disease.

Positive Externality of Production Example:

In Portland Oregon, on February 2 2024, a bill was proposed to increase housing for the homeless from $226,000 to $452,000. The money will go to building houses in the city to help lower the homeless population if the bill is approved.

Negative Externality of Production Example:

From January to October 2023, more than 17,500 people died from air pollution produced from over 8600 factories in 29 industrial areas in Delhi (India). Research showed that the people living there during the time could have their lives shortened by 11.9 years due to the poor-qualified air as well.

Negative Externality of Consumption Example:

Due to overproduction of cars, in Mexico City, the transit density in this city has caused countless road accidents. In 2022, over 15,000 people were killed due to these accidents (4% increase from previous years).

Asymetric Information

The Vioxx scandal of Merck & Co. Is a stark example of asymmetric information, a situation where one party in a transaction has more or superior information compared to another. In this case, the two sides were Merck, the pharmaceutical company, and the patients (along with their healthcare providers) who were prescribed Vioxx. Vioxx was released in 1999 and withdrawn in 2004 due to undisclosed cardiovascular risk, leading to its prescription to over 20 million people. This deliberate concealment of these side effects is an example of asymmetric information highlighting the severe consequences. Eventually, it led to increased regulatory oversight within the drug industry. In 2007, Merck agreed to a $4.85 billion settlement to compensate victims who suffered heart attacks and strokes caused by Vioxx.