1. NS3040 Fall Term 2018 Market Failure/Cost Benefits

2. Market Failures I
A market failure is a situation where free markets fail to allocate resources efficiently due to:
Monopoly power
Markets may fail to control for the abuses of monopoly power
Missing markets
Markets may fail to meet a need or want, such as the need for public goods, such as defense street lighting and highways
With defense free rider problem
Incomplete markets
Markets may fail to produce enough merit goods, such as education and health care

3. Market Failures II De-Merit Goods Negative externalities
Markets may fail to control for manufacture and sale of goods like cigarettes and alcohol, which have less merit than consumers perceive
Negative externalities
Consumers and producers may fail to take into account the effects of their actions on third-parties – pollution, excess noise.
Train case and liability
Positive externalities
Beneficiary does not have to pay – bee problem
Learning on the job – changing jobs

4. Market Failures III Property rights Information failure
Markets work most efficiently when consumers and producer granted the right to own property
Many cases property rights cannot be easily allocated to certain resources – limits ability of market to function – access to credit
Information failure
Markets may not provide enough information during a market transition
It may not be in the interests of one party to provide full information to the other party – lemon problem
Unstable markets
Sometimes markets become highly unstable and equilibrium may not be established

5. Market Failures IV

6. Market Failures V Remedies: Two basic strategies Use price mechanism
Increasing price of “harmful” products taxation
Subsidies for “beneficial” products
Use legislation and force
Licensing system for alcohol, penalizing polluters
Often both used in varying combinations

7. Consumer and Producer Surplus

8. Correcting for Externalities

9. Trade Example of Cost-Benefit

10. Trade: Complete Picture