Market+Failure+ additional+notes


 * Market Failures **

Market failure is simply a failure of the market mechanism to do its job properly. Now remember that "the job" of an economic system, be that system a planned economic system or a market economic system, is to allocate resources efficiently. So basically market failure is when the market economic system fails to allocate resources efficiently. What this basically means is one of 3 things:
 * Some goods/services are over produced/consumed
 * Some goods/services are under produced/consumed
 * Some goods/services are not produced at all.

When market failure occur Governments intervene (Government intervention) to try and correct these failures. It is because of market failures that most economic systems are "mixed economies" as without government intervention, market failures would lead to resources being allocated inefficiently.

="Externalities" and Market Failures = Many market failures occur because of the existence of externalities. Externalities are third party effects arising from production and consumption of goods and services. Third parties are people who are neither Suppliers nor demanders of the good. An example may be smoking-I don’t produce or consume tobacco, but if someone is smoking near me I certainly am affected by this. This is therefore a negative externality as it is a bad effect on a 3rd party. External costs and benefits are around us every day – the key point is that the free market mechanism may fail to take them into account when pricing goods and services. Externalities can cause market failure if the price mechanism does not take them into account.


 * Why are the following externalities? **
 * Passive smoking
 * Motorists in Jakarta benefiting from less traffic jams due to the building of a "Skytrain".
 * Dog owners allow their “animals” to foul pavements (dog poo!)
 * Air pollution from road use causes a rise in premature deaths
 * A person getting a flu jab, to stop them getting flu.

**Difference between private cost and social cost **
<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">The existence of production and consumption externalities creates a difference between private and social costs of production and also the private and social benefits of consumption.


 * <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">Social Cost = Private Cost + External Cost **


 * <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">Social Benefit = Private Benefit+ External Benefit **

=<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">Student Task: In the Table below list all of the various costs and benefits of driving a motor car =
 * =<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">Private Costs =

= = || =<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">Private Benefits = = = = = = = = = = = = = = = = = = = || = = = = = = = = = = = = = = = = = = = = || =<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">External Benefit = ||
 * =<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">External Cost =

=<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">Negative Externalities = <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">When negative production externalities exist social costs exceed private cost. This leads to the output being greater than what is best for society overall ( "the social optimum level of production".) The individual consumer or producer does not take the effects of externalities into their calculations and so there is over production of these goods.

<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">External costs from production: <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">Here is an example of air pollution. Note the producer is not paying for these external costs
 * <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">Noise pollution and atmospheric pollution from factories
 * <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">Long-term environmental damage caused by depletion of our stock of natural resources

<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">media type="youtube" key="k1JGGjAm42c" height="315" width="560"

<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">External costs from consumption:
<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">Consumers can create externalities when they consume goods and services. Examples include:
 * <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">pollution from cars and motorbikes
 * <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">externalities created by smoking and alcohol abuse.

<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">Often goods which are over consumed/produced are known as Demerit goods. Remember they are over consumed because the price only reflects the private cost and not the true social cost of consumption/production. Therefore the overall cost to society is greater than the benefit to society <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">In the diagram below we can show this The market mechanism will lead to an output of Qp. (where Supply=Demand). remember we don't take into account the external costs For society as a whole though the efficient allocation of resources (if you wish "the best output") is where social benefit= social cost at output Qs. Note the difference between the two curves PC and Sc is the external costs. If we sum up the excess of SC over SB between Qs and Qp we arrive at a figure that gives an indication of the welfare loss to society of the current private level of output. This is the triangle ABC. Society as a whole could be made better off by reducing the current level of output from Qp to Qs. <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">

====<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">(Note that the above analysis is advanced for IGCSE, but at least you should be able to explain that demerit goods are over consumed, even if the diagrams are a little confusing!) ====

=<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">Market Failure with Positive Externalities = <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">Positive externalities create additional external benefits beyond the people directly consuming a good or service (i.e. social benefits > private benefits). Examples of positive externalities include:
 * <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">Education: A well-educated labour force can increase efficiency so we all benefit, not just those being educated
 * <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">Health provision: Improved health provision and health care reduces absenteeism and creates a better quality of life and higher living standards.

<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">Education and healthcare are often known as examples of Merit goods. Merit goods are under consumed as the market mechanism fails to take account of the external benefits from consuming these goods. It is this under consumption which is the market failure. This under consumption may come about because low income groups may not be able to afford healthcare or education, or an individual may choose not to consume them even though they are beneficial to the individual and society. In the diagram below the market mechanism would lead to QP being consumed but the efficient allocation of this good is where social cost=social benefit at QS

<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">

=<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">Public Goods and Market Failure =

<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">Characteristics of public goods
<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">The characteristics of pure public goods are the opposite of private goods.
 * <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">Non-excludability: Goods cannot be confined to those who have paid for it. In this sense, non-payers can take a free ride and enjoy the benefits of consumption
 * <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">Non-rivalry in consumption: Consumption by one person does not reduce the availability of a good to others.

<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">Examples of public goods
<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">Examples of public goods include flood control systems, street lighting and national defence. <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">Public goods (in fact most of them are services!) are not normally provided by the private sector in an economy. this is because it is hard to charge people for these goods. Given that you cannot be excluded from consuming these goods would you pay to use them?

==<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">Student task: Find your own real life example of market failure. Explain why it is a market failure in terms of what externalities occur and also explain how Governments are intervening to try and correct the market failure. [|A good starting point is here] ==

<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">Negative externalities:

media type="file" key="Binge drinking in Liverpool.wmv" width="483" height="483" align="center"

media type="file" key="Passive smoking.wmv" width="486" height="486" align="center"

<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">Finally here is the link for a video explaining the concept of Public Goods

<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">Revision pages for mindmaps

<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 18px;">Summary Activity <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 18px;">