book 3 - market failure

types of market failure

• overproduction/consumption

• underproduction/consumption

• no production (missing market)

• asymmetric info

• factor/labour immobility

overproduction/consumption

caused by:

• negative externalities

• imperfect information

market oriented solutions:

• production tax

• pollution tax (only for production activities that produce pollution)

• tradable permits (only for production activities that produce pollution)

command solutions

• regulations — bans, quotas, standards

other solutions:

• public education (for imperfect information)

underproduction/consumption

caused by:

• positive externalities

• imperfect information

market oriented solutions:

• subsidies

• vouchers, grants

command solutions

• regulations — compulsory consumption

other solutions:

• public education (for imperfect information)

no production (missing market)

caused by:

• public goods

market oriented solutions:

• not applicable

command solutions

• direct provision (making it free)

• government outsources production to private firms

other solutions:

• not applicable

imperfect information

caused by:

• asymmetric information

command solutions:

• regulation

factor/labour immobility

market oriented solutions:

• subsidise skills training

• subsidise private housing

command solutions:

• build public housing

causes of occupational labour immobility

1. lack of skills and knowledge — acquired from training and education

2. lack of natural talent — not everyone can fit a certain job scope

3. barriers imposed by professional associations and trade unions — difficult for outsiders to enter without qualifications

causes of geographical labour immobility

1. family and other social ties — jobs in another city results in separation from family and friends

2. costs of moving — cost of selling and buying house, etc.

3. differences in costs of living