1. Market Failures and The Role of Government

3. Market Failures Market failure – can occur when any of the following five conditions are significantly altered –Inadequate competition –Inadequate information –Resource mobility –Externalities –Public Goods

4. Inadequate Competition Mergers and acquisitions cause fewer and fewer firms which causes them to have a larger stake in the market Inefficient resource allocation – as companies grow larger, they have little benefit to use their resources effectively –Leads to bonuses, jets, retirement plans –This is why public services, such as electricity, are regulated by the government

5. Inadequate competition – cont. Higher prices and reduced output –Companies can use these methods to limit productivity and prevent competition Economic and political power –Enables businesses to influence politics –The company may threaten to move, or close its doors Both sides of the market –Demand v. Supply –Who wins? –Demand side failure are harder to fix than supply side failures

6. Inadequate Information As soon as people become less informed, the market can begin to fail The harder the information is to find, the more probable the failure –Government?

7. Resource Mobility Land, Labor, Capital, Entrepreneurs do not move to the markets where the returns are the highest Example – closing a large factory –What happens to the employees?

8. Externalities Externality – unintended side effect that either benefits or harms a third party not involved in the activity that caused it Negative externality – the harm, cost, or inconvenience suffered by a third party because of actions by others Positive externality – a benefit received by someone who had nothing to do with the activity that generated the benefit Why are these market failures?

9. Public Goods Public Goods – products that are collectively consumed by everyone, and whose use by one individual does not diminish the satisfaction or value available to others –Parks

10. The Role of the Government What role does the government play? –Antitrust –Regulate Monopolies –Government Regulatory Agencies

11. Antitrust Legislation Trusts – legally formed combinations of corporations or companies 1890 – Sherman Antitrust Act –First significant law against monopolies –Sought to do away with monopolies and restraints that hindered competition

12. Antitrust Legislation Clayton Antitrust Act – 1914 – Strengthened Sherman Act by outlawing price discrimination –price discrimination – the practice of charging different prices for the same product Federal Trade Commission Act – 1914 – Established the Federal Trade Commission and gave it the ability to issue cease and desist order –Cease and desist order – an FTC ruling requiring a company to stop an unfair business practice

13. Antitrust Legislation Robinson-Patman Act – 1936 – Forbade rebates and discounts on the sale of goods to large buyers unless the rebate and discounts were available to all

14. Government Regulatory Agencies PAGE 180 …