1. When the market is helpless: market failures and externalities
Session 1
When the market is helpless: market failures and externalities

2. Capitalism and the market
Capitalism is based on the assumption that resources are best allocated through the market.
A market is efficient if the resources are neither over-allocated (too much of the good) nor under-allocated (too little of the good)
Market efficiency derives from perfect competition and perfect information: free market
Liberalism and laissez-faire: state intervention should be minimal
Removing the obstacles to free market
Is the market always perfect?

3. Imperfect markets
Most economists agree that the market is not always perfect. When does this happen?
Imperfect competition
Monopolies and cartels
Barriers to trade
Externalities
Public goods - often related to externalities
Equity / Ethical principles
Instability: recession or bubbles
These imperfections are called market failures, and often justify state’s intervention

4. How can market failures be solved?
Two possible avenues:
Social democrats argue for an intervention of the state in the economy
Neoliberals promote market-based solutions
Different types of policies:
Regulations
Subsidies and taxes
Public provision of a good
...

5. Externalities
An externality occurs when a party external to a market unvoluntarily bears the costs or receives benefits related to a transaction of the market.
Definition not easy: tendency to focus on what they do instead of what they are.
Meade:
An external economy (diseconomy) is an event which confers an appreciable benefit (inflicts an appreciable damage ) on some person or persons who were not fully consenting parties in reaching the decision or decisions which led directly or indirectly to the event in question.

6. Different types of externalities
Positive and negative externalities:
Smoking
Gardening
Public (undepletable) and private (depletable) externalities
Air pollution
Wireless internet networks
Technological (real) and pecuniary (fake) externalities
Oil spills
Price of oil

7. Internalising the costs

8. How to meet the social costs
Command and control
Laws and regulations
Civil tort law
Class actions
Concept of ecological damage
Provision by the government
Public goods
NGOs and charities
Pigouvian taxes and subsidies
Aim to correct a bad - often the most favoured option

9. Relation to public goods
Public goods are best understood as one particular type of externalities
The internationalisation of externalities compromises the provision of public goods