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Market Failure

Market Failure . Monopoly Public Goods Merit & Demerit Goods Externalities. Re-cap – Year 10 Economics. Economics looks at how we fulfill peoples…… The Economic problem is (W?H?W?). The Economic problem. Scarcity and limited resources People have infinite demands

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Market Failure

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  1. Market Failure Monopoly Public Goods Merit & Demerit Goods Externalities

  2. Re-cap – Year 10 Economics • Economics looks at how we fulfill peoples…… • The Economic problem is (W?H?W?)

  3. The Economic problem Scarcity and limited resources People have infinite demands Society needs to determine how to produce and distribute these relatively scarce resources We could limit our demands; be satisfied with the basic necessity's of life Society dominated by people wishing to consume more goods and services than are available

  4. Market Failure - Welfare • Welfare is a key concept in economics. • The concept of welfare in economics relates to people’s material wellbeing (i.e. access to goods & services)

  5. Market Failure • Market Failure occurs when a free market fails to maximise welfare. • If the market is failing it is possible to increase the welfare of more people. • In Economics it is important to understand how we use scarce resources to maximise welfare.

  6. Market Failure A Market can Fail in three ways • It can over or under produce goods/services. • It can over or under price goods/service. • It can produce goods / services in an inefficient way.

  7. Market Failure - Examples • In each of the following cases the market fails • Monopoly – A lack of Competition • Public Goods – Under production of some goods/services • Merit & Demerit Goods – We make bad choices • Externalities – We only consider ourselves

  8. Market Failure Part 1 Monopoly An Absence of Competition

  9. Which companies face little or no competition?

  10. Good Service? Bad Service?

  11. Do you have an alternative?

  12. Does more choice lead to a better deal for customers?

  13. Monopoly • A ‘pure’ monopoly exists when one firm supplies a specific good or service. • A monopoly holds a dominant market position. • Economists are concerned with monopolies as dominant firms ‘could’ abuse there position.

  14. Task • In pairs indentify three ways in which a dominant firm may abuse its market position.

  15. Monopoly – abuse of power Monopolies can: • Increase Prices • Reduce Choice • Lower Quality of Goods & Services • Operate inefficiently

  16. Task • Using Page 206 in the textbook(Moynihan) explain the key features of a monopoly in your own words. • Explain how each feature results in a loss of welfare for consumers (or why the market fails)5

  17. Monopoly Power A firm does not have to be the only firm to be able to abuse its position. A firm has Monopoly Power if it is able to • Increase the price • Restrict or control supply

  18. Barriers to Entry A firm will usually have some form of monopoly power if the market has Barriers to Entry. A Barrier is anything which potentially stops new firms challenging the existing firms in an industry. In your exercise books outline the natural and artificial forms of Barriers to Entry Using pages 207 -208 from the textbook.(moynihan)

  19. Task • For each of the companies given outline the potential types of barriers to entry for each industry • List the markets in order from lowest to highest barriers to entry i.e.: 1 = Highest impossible to overcome 6 = Lowest could be overcome

  20. Homework – Assignment. • Using the internet you will research and produce a 500 word report on a firm which has abused its monopoly power. • You must find an example of how the firm was able to abuse customers. • You must say weather the firm was able to do this because of the existence of barriers to entry.

  21. Market Failure Part 2 Public Goods Missing Markets / Under provision.

  22. Who produces / provides the following goods & services

  23. C) No provision at all!!! …..what would happen to the production of the following goods & services? Would they be…….. If there was no government …… A) Overprovided (i.e. too much) B) Underprovided (i.e. not enough)

  24. Public Goods • Public Goods are a specific type of good (or service) which the free market system can notadequately provide. • Public Goods have certain characteristics which result in the market being unable to provide such goods. The price mechanism cant function properly.

  25. Public Goods - Characteristics • Non – Rival; This means that if one person consumes the good it doesn’t diminish the quality or quantity of that good which is available to others. • Non-Excludable; This means that if one person consumes the good other people can not be stopped from enjoying the benefit of that good.

  26. Public Goods – The Problem • Q. If you pay to consume a public good will I also pay to consume it???? • Q. What happens as a result of this?

  27. The Free Rider Problem • Some people will choose not to pay for a public good or service if they know that others are willing to pay for it. They want to be a free rider. But what if the other person is thinking the same thing???? • The result is that nobody is willing to pay or that private businesses can not profitably produce the good.

  28. Pure & Quasi Public Goods • A Private Good = Rival & Excludable • A Pure Public Good = Non-Rival & Non-Excludable • A Quasi Public Good = Has Some features of a public good

  29. Private / Public / Quasi Public Which Goods are Private and Which are Public?

  30. Public Goods – Why the market fails? • The free market either under provides or completely fails to provide Public Goods. This is a market failure.

  31. Market Failure Part 3 Merit & Demerit Goods Making the wrong Choices

  32. Starter Question • Right now……… • How many of you……. • Would rather be somewhere else?????

  33. Reflection • If you were to leave class now would this be a short run or benefit or cost? • How might your decision to repeatedly leave the classroom benefit you in the long run? • More importantly what would the costs be?

  34. Merit & Demerit Goods • When we chose to consume certain goods we don’t always make the right decision because we don’t always see the bigger picture. • We have imperfect information

  35. Merit & Demerit Goods • Merit Goods • We under consume merit goods • We underestimate the benefits & overestimate the costs.

  36. Merit & Demerit Goods • Demerit Goods • We over consume demerit goods • We overestimate the benefits & underestimate the costs.

  37. Task • On your own for decide whether each of the following goods or services are merit or demerit goods/services. • Explain and give examples of the costs and benefits which we either over or underestimate.

  38. Cigarettes

  39. Loft Insulation

  40. Public Library

  41. Junk Food

  42. Gym Membership

  43. Task • Complete Activities 3-5 on Page 73 in your textbook (Horner)

  44. Review - Complete the following sentence • Whilst right now I would rather nothing more than to leave this economics classroom, I will not leave because studying economics is a_______ _________. I will study economics because the long term _________ outweighs the short term________. I no longer have i_________ i__________.

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