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 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

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)

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.

Market Failure A Market can Fail in three ways 1.It can over or under produce goods/services. 2.It can over or under price goods/service. 3.It can produce goods / services in an inefficient way.

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

Market Failure Part 1 Monopoly An Absence of Competition

Which companies face little or no competition?

Good Service? Bad Service?

Do you have an alternative?

Does more choice lead to a better deal for customers?

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.

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

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

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

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 1.Increase the price 2.Restrict or control supply

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 from the textbook. (moynihan)

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

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.

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

Who produces / provides the following goods & services

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

Public Goods Public Goods are a specific type of good (or service) which the free market system can not adequately provide. Public Goods have certain characteristics which result in the market being unable to provide such goods. The price mechanism cant function properly.

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.

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?

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.

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

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

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

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

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

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?

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

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

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

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.

Cigarettes

Loft Insulation

Public Library

Junk Food

Gym Membership

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

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__________.