Why do markets fail?
- Price did not reflect value because of information or time problems
- An externality could arise- something that society or other people pay for rather than the consumer or producer
- Something about the good may disrupt the market (no market in public or merit good)
A ' Tragedy of Commons' may occur because no-one has a property right.
Demand on this diagram is the same as Marginal Social Benefit.
Tools government can use to fix market failure:
- Taxes and Subsidies
- Government povision
- Max and Min prices ( set prices)
- Buffer Stock
- Prohibition
- Regulation: Fines, Parking, Bus Lanes.
- Get the government to provide information
- Control of use- license
Economic questions the government has to ask itself:
- Will it work?
- Side effects; Will it create new problems?
- How do you administer it? Bureaucracy is a problem.
- What are wider costs of regulating it?
How do you internalize the externality?
- Fine/Prohibition
- Tax
- Regulate restaurants
- Make people pay for their own healthcare
- License restaurants
Private cost- Economic cost to the parties involved or the cost to firms and consumers involved.
An External Cost- a cost to an uninvolved third party
Merit good
A Merit good is a good with a positive externality- which is beneficial for the consumer and society. It is under-consumed in a market economy. It needs to be provided or Subsidized.
Demerit good
Demerit good is cheaper for the individual than for society. It is too cheap and over-consumed. These goods need to be taxed, regulated or prohibited.
Monopoly- One firm dominates the market/ one firm is the market
Asymmety- One side has more power or knowledge. The price mechanism can not therefore work, it cant signal or incentives.
Monopony- When there is only one buyer of a good (usually in labour markets).
Moral Hazard- a feature of a market that encourage bad behavior or rewards inefficiency. e.g. self-satisfied lans or mortgages.
