1. 1.4 Market Failure

2. Does the Free Market ever FAIL to meet society’s needs?

3. (When the invisible hand (pictured) doesn’t work.)
What is a market failure?
A situation in which the free-market system fails to satisfy society’s wants.
(When the invisible hand (pictured) doesn’t work.)
Private markets do not efficiently bring about the allocation of resources.
Too much of some things Not enough of others

4. Common Access Resources
Common access resources - Resources that are not owned by anyone, do not have a price and are available for anyone to use without payment.

5. Common Access Resources
Rivalrous – The consumption of these resources affects the ability of others to consume them (characteristic of private goods) Non-excludable – People cannot be restricted from consuming (characteristic of public goods)

6. Common Access Resources
Sustainability – The ability of something to be maintained and preserved over time Cyrus sustainability What is environmental sustainability? What is economic sustainability?

7. Common Access Resources
The inherent conflict
Economy
Environment
Increase output produced and consumed
Focusing only on this goal may result in environmental destruction
Preserve the environment
Focusing only on this goal may result in needs and wants not being satisfied

8. Common Access Resources

9. Common Access Resources
Sustainable development – Development that meets the needs of the present without compromising the ability of future generations to meet their own needs.

10. Common Access Resources
Price of harming the environment
Problem: No price signal for environmental degradation How long would you be in the shower if there was no cost? Video
Demand Q

11. Common Access Resources
The use of fossil fuels to satisfy demand is a threat to sustainability. How? Show via diagram.

12. Pollution of Affluence
Industrial production
High-income consumption patterns
Heavy use of fossil fuels
Depletion of common access resources

13. Pollution of Poverty Pollution of poverty Lack of knowledge / tools
High birth rates
Over exploitation of land for agriculture
Lack of resources to say ‘no’

14. Common Access Resources – Price signal
A price signal
Incentivises efficiency
Punishes inefficiency
Makes consumers and producers think more
“What is common to the greatest number has the least care bestowed upon it” - Aristotle

15. Common Access Resources – Price signal
EU Carbon Trading
Video
Energy efficiency incentive
Governments control ‘supply’ of pollution

16. Common Access Resources – Govt responses
Legislation –
Restrictions on car emissions
Catalytic converter requirements
Restrictions on factory and production emissions
Smokestack scrubber requirements
Banning harmful substances (e.g. asbestos, CFCs)
Hunting seasons/areas
Fishing bag limits, size limits
Development limits
Protected areas (e.g. national parks, marine parks)

17. Common Access Resources – Govt responses
Legislation – advantages
Simplicity
Can be very effective
disadvantages
No incentives to reduce emissions
No incentives to increase energy efficiency
No incentives to switch to alternative fuels
Monitoring costs

18. Carbon Tax vs Cap and Trade
Fixed price (as per Australia’s Emissions Trading Scheme)
Certainty for investment
No cap on emissions
Market distortions not possible

19. Clean energy technologies
The underallocation of clean energy technologies is an example of market failure. Show this in diagram form.

20. Clean Energy Technologies
Mums and Dads consume clean energy

21. Clean Energy Technologies
Firms research clean technologies
How can we fix this market failure?

22. Correcting Positive Externalities
Government provision
Subsidies
Advertising (consumption)
Legislation (e.g. compulsory solar cells)

23. Common Access Resources
The value of common access resources Video

24. Common Access Resources - pollution
Explain, using negative externality diagrams, why the Black Sea might be more likely to be polluted than Lake Michigan.
“What is common to the greatest number has the least care bestowed upon it” - Aristotle