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Unit 8. Market Failures

Unit 8. Market Failures. IES Lluís de Requesens (Molins de Rei)‏ Batxillerat Social Economics (CLIL) – Innovació en Llengües Estrangeres Jordi Franch Parella. - It is claimed that markets fail sometimes and that the government can correct the failure: 1) Externalities 2) Public Goods

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Unit 8. Market Failures

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  1. Unit 8. Market Failures IES Lluís de Requesens (Molins de Rei)‏ Batxillerat Social Economics (CLIL) – Innovació en Llengües Estrangeres Jordi Franch Parella

  2. - It is claimed that markets fail sometimes and that the government can correct the failure: 1) Externalities 2) Public Goods 3) Monopolies 4) Inequality 5) Crises 1), 2) and 3) refer to a misallocation of resources. 4) refers to an unqual distribution of resources 5) refers to a lack of stabilization Market Failures

  3. Externalities • Externalities are effects on others not contemplated within the price • With a negative externality the social cost is greater than the private cost and the market overproduces (pollution)‏ • With a positive externality the social benefit is bigger than the private benefit and the market underproduces • Externalities exist because of a lack of clear property rights

  4. Public Goods • Public goods are non excludable (consumers cannot be prevented from consuming) and non diminishable (the consumption of A does not reduce the consumption of B)‏ • Public goods suffer from the free rider problem and are usually provided by the public sector and not the private sector

  5. Inequality • What should the government do about economic inequality? • Economic analysis alone cannot give us the answer • The question is a normative one and not positive • The richest fifth of the families earns about ten times as much as the poorest fifth • Policies to help the poor include: welfare, subsidies and in-kind transfers, minimum wages

  6. Inequality • According to Utilitarianism (Jeremy Bentham and John Stuart Mill), the government should choose policies to maximize total utility of everyone • Utilitarians would choose the distribution of income to maximize the sum the utility of every one in the society (an additional € for the poor involves more utility than an additional € for the rich)‏

  7. Inequality • According to social-democracy (John Rawls), the government should choose policies deemed to be just (evaluated by an impartial observer behind the “veil of ignorance”)‏ • Public policy based on the maximin criterion (to maximize the utility of the worst-off person in society)‏ • This idea considers the redistribution of income as a form of social insurance

  8. Inequality • According to libertarianism (Murray Rothbard), the government should preserve private property, enforce voluntary agreements and punish crime, but should not redistribute income • Libertarians argue that equality of opportunity is much more important than equality of income (formal equality but not material equality)‏

  9. Crises • The world is suffering now a global crisis. Is the free market to blame? Or are the Central Banks and the policymakers to blame? • Interest rates are artificially low, but saving is not high. What are the effects? • The creation of money out of thin air is increasing. What are the effects? • Commercial and saving banks have increased the credit without the backing of saving. What are the effects?

  10. - Housing Bubble: Who is to blame? - Creation of money: Who is to blame? Crisis

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