MARKET FAILURE (3.4) Market Failure

Transcription

1 MARKET FAILURE (3.4) Market Failure

2 1 12 MARKET FAILURE (3.4) BEFORE you start this unit (in pencil)... write the key idea of this unit in the centre of the page write what you know about this idea around it and draw lines to them. try and group the ideas together mind-map Mind-maps are very good revision tools. Our minds learn by making patterns. Mind-maps help you to make these patterns and so makes the content easier to learn and remember. AFTER you finish this unit (in pencil)... remove anything that doesn t belong to this unit ensure that things are grouped together appropriately. Move stuff around if needed add any extra ideas that you think are missing

3 MARKET FAILURE (3.3) (3.4) unit overview 13 1 fidid we mention the side-effects? In achievement standard 3.2 we looked at two types of markets - perfect competition and monopoly. These are the two extreme examples of perfectly competitive and imperfectly competitive markets. In this unit we look at the other types of markets, and how consumers and producers behave in these markets. by the end of this unit, you should be able to answer these questions... 1 what is market failure? market failure 2 how can the government respond to market failure? 3 what are equity and efficiency?

4 14 MARKET FAILURE (3.4) 1 The Free Market Model... Fact or Fiction? 1. The diagram below represents the idea of free markets providing a level playing field. Identify the conditions necessary for markets to achieve allocative efficiency and then complete the text below. Allocative Efficiency P _ S _ Exercise 1.1 Free Market... Fact or Fiction? _ 2. Use the words listed in the box below to complete the text that follows. outcomes inequity allocative efficiency externalities solution intervention economic problem The Free Market Model We study one to the the free market solution. This is the typical way most economies in the world try to achieve. But not entirely. Most also have some form of government. This is usually necessary because the market does not work properly and the Government has to fix it or because the market outcomes are considered socially undesirable, i.e. or exist. D Q

5 MARKET FAILURE (3.4) Every three years the different political parties vie to be part of the New Zealand Government. To get there, they must propose various social and economic policies that they believe New Zealand needs or the public want Below are a list of suggested policies of various parties. Identify which economic role each policy relates to. Policy Labour has restored balance to workplace relations with a series of legislative measures including the Employment Relations Act 2000 and the Holidays Act Public-Private Partnerships... the public and private sector should jointly plan for required capacity in both facilities and workforce. Some new hospital infrastructure and investment in new technologies, such as PET scanners, can be financed by public-private partnerships.... the next National Government will contribute an investment of up to $1.5 billion in Crown capital over six years to accelerate the roll-out of a fibre-to-the-home (broadband) network for New Zealand. Tourism is a major contributor to the New Zealand economy and Labour in government will continue to work in partnership towards a secure and sustainable long-term future for the industry. The Green Party will end child poverty: Work for a cross-party accord to end child poverty by Introduce a Universal Child Benefit and end Working for Families discrimination against beneficiary families. Raise the minimum wage to $12 an hour. Economic Role Labour has refocused the immigration programme to facilitate the entry of those migrants who are best placed to contribute to the New Zealand economy. 2. For each of the economic roles, find and describe a relevant policy proposed by a political party not referred to in (1.). Economic Role Policy Allocative Distributive Regulatory Stabilisation Exercise 1.2 Government Intervention

6 16 MARKET FAILURE (3.4) 1 notes Introducing Market Failure Back to the Beginning... The Price Mechanism Society wants firms to produce the goods and services that people want. As preferences change, e.g. growing demand for e-books over print books, we want firms to be aware of this and respond to the changes in demand. In Achievement Standard 3.3, we looked at how the price mechanism, i.e. market forces works to get firms to allocate their resources away from goods or services less in demand (e.g. print books) to producing goods and services more indemand (e.g. e-books). Figure 1.1 shows this shift from print books to e-books on a production possibility curve. In this way the price mechanism achieves allocative efficiency... in and between markets. Figure The Price Mechanism and Allocative Efficiency Across Markets print books A As consumer preferences shift towards e-books, the price mechanism (market forces) will send signals to producers that e-books are more profitable. Firms will respond by producing more e-books and less print books... and so achieve allocative efficiency in each of the markets and across the economy.. B e-books In the ideal world of market economists, market forces will operate smoothly and firms will always use resources to produce exactly what consumers want... and change this whenever consumers preferences change. BUT THE WORLD S NOT PERFECT Price Mechanism: The way a simple piece of data, i.e. price, is able to convey a range of complex information to buyers and sellers, and affect their behaviour.

7 Market Failure MARKET FAILURE (3.4) In reality, the price mechanism is not perfect. For a variety of reasons, market forces are not able to operate as effectively as possible and so allocative efficiency does not occur. This standard looks at four ways that the price mechanism (market forces) are unable to operate correctly and so fail to achieve allocative efficiency: 17 1 externalities: public goods the market fails to account for the side-effects of producers or consumers actions and so fails to produce the correct quantity of a good or service. the nature of a good or service means that there is no incentive incentive for firms to produce it, even though people want it. market abuse / dominance market conditions occur, or some in the market acts in a way, that one or a few firms manipulate a market to their advantage, at the expense of other consumers or producers inequality an unequal distribution of income leads to long-term inequity where individuals, families or groups have less opportunity to participate in markets and wider society Market failure does not mean that a market fails to achieve equilibrium. A market may achieve equilibrium that but society as a whole may not be happy with the outcome. An example of this is illegal drugs such as methamphetamines. With no regulations firms, i.e. drug dealers, would produce methamphetamines for customers. Supply and demand would interact until they are equal, and producer and consumer surpluses are maximised. But... methamphetamines are highly dangerous to the users and those around them. If we allowed the market to produce them because there s demand for them, we would have more crime. And society doesn t want that. So from society s point of view producing any methamphetamines is producing more than society wants as a whole due to the unwanted side-effects. Even though the price mechanism is working in a pure theoretical sense, it is not producing the outcome society wants and so it not allocatively efficient. So market failure can be when conditions prevent a market from operating efficiently... OR... when a market does operate efficiently, but the wider society is not happy with the outcomes. In either of these cases, the government needs to step in to address the market failure. Market Failure: When the price mechanism is not able to operate and markets are unable to achieve allocative efficiency..

8 1 18 MARKET FAILURE (3.4) Figure Conditions of Market Failure CONDITION Consumer Sovereignty... consumers choose what to buy... consumers have the final say in what is produced MARKET FAILURE OCCURS WHEN the government chooses to restrict consumers choices, e.g. heroin, fire crackers, guns POSSIBLE RESPONSE... government regulation Perfect Competition... all four assumptions are true: many buyers and sellers perfect knowledge identical product no barriers to exit and entry No Externalities... no unintended (and unpaid for) side-effects occur when people make or consume goods and services No Public Goods... firms can restrict access to their goods or services and so charge consumers for them... one of the assumptions is broken e.g. barriers to entry exist one firm dominates the market and produces a level of output below market equilibrium and allocative fficiency. e.g. imperfect knowledge misleading advertising results in consumers making incorrect decisions.... factories produce smog, but don t pay for it... consumers create pollution (e.g. 2nd-hand smoke) that others suffer... unable to stop people accessing a good or service for free, firms will choose not to produce them, e.g. national parks, national defence, roading... anti-monopoly legislation... consumer laws e.g. Fair Trading Act, Consumer Guarantees Act... regulation of production or consumption... subsidies or sales taxes... identify property rights... government provision of these goods / services. Government Intervention to Resolve Market Failure The New Zealand economy is predominantly a market economy, i.e. the majority of goods and services are produced by private firms for individual consumers in markets through New Zealand. But for the reasons identified above, the markets often fail. Either they are unable to operate efficiently, or they produce outcomes that society as a whole is not happy with - such as the example of methamphetamines. Where market failure occurs, the government usually steps in to address the failure. Government interventions in the economy fall into four roles: allocative provision of goods and service (e.g. health, education) distributive regulatory stabilisation the transfer of wealth or income between different groups in society to improve equity (eg.taxes, welfare benefits) the creation and enforcement of laws around markets and the behaviour of producers and conusumers in markets (e.g. Fair Trading Act, Consumer Guarantees Act) economic polices aimed at sustained, long-term economic growth (e.g. monetary policy)

9 Equity and Efficiency MARKET FAILURE (3.4) The effectiveness of any government policy can be judged against two criteria - efficiency and equity Efficiency This refers to allocative efficiency, i.e. supply and demand are working effectively to maximise consumer and producer surplus. However our definition of allocative efficiency must include the wider impact of goods and services on society, i.e. the social costs and benefits of producing or consuming goods or services such as pollution, crime, etc. Equity Equity is when people have the same chance or opportunity to succeed, i.e. when things are fair. This does not mean that everyone gets the same income or outcomes - that s equality. Equity means that everyone gets the same chance and is treated fairly. Figure Black Markets A black market is one that exists illegally. They are markets where someone chooses to produce or provide a good or service that the government has banned or that the government allows only under very tight controls (including sales taxes). Typical examples include markets for guns, illegal drugs, stolen goods, etc. In one sense these markets are very efficient... consumer sovereignty is absolute. If you want any good or service... and are willing to pay for it... someone will provide it for you. Resources have flowed to the production of goods and services demanded by consumers! BUT... often in these markets, not all of the costs of benefits to society (externalities) are considered when individuals choose to produce (or buy) certain goods. For example, drug users consider their immediate enjoyment of the drugs but not the cost of health-care that they may need or crimes that they may commit to fund their habits.

10 20 MARKET FAILURE (3.4) 1 UNIT 1 Market Failure Unit Content: 1.1 What is Market Failure? Back to the Beginning... The Price Mechanism Market Failure Government Interventions to Resolve Market Failure Equity & Efficiency 1 (poor) Understanding 2 3 (good) checklist: I have... done a mind-map of the main ideas (before and after I ve done the work) tried (and marked) all of the exercises watched the online videos of this work read the notes and summarised the key ideas in the margins of the pages made (or downloaded from quizlet) flashcards of the key ideas and definitions relevant current events and examples: relevant events and examples for this unit are: I didn t really get the following parts of this unit and I m going to ask to help me with this