Irp-cdn.multiscreensite.com



Market failureDefinitionMarket failure happens when the price mechanism fails to allocate scarce resources efficiently or when the operation of market forces lead to a net social welfare loss. Market failure exists when the competitive outcome of markets is not satisfactory from the point of view of society that is, too much may be produced and consumed e.g. alcohol, cigarettes and foods high in sugar, salt or saturated fats alternatively, too little may be produced or consumed such as exercise, education or foods that bring additional health benefits. What is satisfactory nearly always involves value judgments.It is important to distinguish between complete and partial market failureComplete market failure occurs when the market simply does not supply products at all - we see "missing markets"Partial market failure occurs when the market does actually function but it produces either the wrong quantity of a product or at the wrong plete market failure Partial market failure (too little consumed or price or price is too low e.g. fruit).Partial market failure (too much consumed or price or price is too high e.g. alcohol)Positive and negative externalities in production and consumptionPositive externalitiesA positive externality is a benefit that is enjoyed by a third-party as a result of an economic transaction. Third-parties include any individual, organisation, property owner, or resource that is indirectly affected. Where positive externalities exist, the good or service may be under-consumed or under-provided since the free market may fail to value them correctly or take them into account when pricing the product. If there are external benefits the market delivers an output below the quantity that maximises social welfare. Positive externalitiesPositive externalities in production These are positive externalities created due to production of certain goods and services. Examples include, when firms train their employees which result in better manpower or invest in research and development and succeed in developing new technologies which benefits the society. Other examples include the provision of health and education . Can you put and economic case for state provision of laughter shows?Positive externalities in consumptionVaccinations. There are obvious benefits for the person receiving the vaccine, they are less susceptible to disease and children in particular are more likely to attend school and earn more income over their lifetime. It can also be good for an entire population since, if enough of its members are vaccinated, even those who are not will receive a measure of protection. That is because, with only a few susceptible individuals, the transmission of the infection cannot be maintained and the disease spread. The economic case for vaccination, therefore, looks strong. Spending on vaccination programmes appears to be a sound social investment for the future.Negative externalitiesA negative externality is a cost that is suffered by a third party as a result of an economic transaction. In a transaction, the producer and consumer are the first and second parties, and third parties include any individual, organisation, property owner, or resource that is indirectly affected. Negative externalities occur when production and/or consumption impose external costs on third parties outside of the market?for which no appropriate compensation is paid.Negative externalitiesNegative externalities in production A common example of a negative externality is pollution. For example, a steel producing firm might pump pollutants into the air. While the firm has to pay for electricity, materials, etc., the individuals living around the factory will pay for the pollution since it will cause them to have higher medical expenses, poorer quality of life, reduced aestetic appeal of the air, etc. Thus the production of steel by the firm has a negative cost to the people surrounding the factory--a cost that the steel firm doesn't have to pay.Negative externalities in consumptionPrivate consumers of the good benefit more from its consumption than society as a whole. Consider the example of tourists in a beach town who consume large amounts of alcohol while on holiday. Such individuals are just enjoying themselves, and may get drunk, but in the process they create lots of trouble for the local community in the beach town. The external costs of their behaviour may include:vandalism of propertypublic displays of bad behaviourphysical harm to others, if they attempt to drive or walk home while drunkcosts to local taxpayers, whose taxes support the police and emergency services that are often called upon to deal with the behaviour of drunk tourists.Additional reading economics/topics/externalitieseconomicsonline.co.uk/Market_failures/Externalities.htmlexternal/pubs/ft/fandd/basics/external.htm style questionsPaper 1, Section AWith the help of a diagram, explain the negative externalities that are associated with the consumption of foods high in saturated fat. (9) – note case study required to satisfy mark schemeWith the help of a diagram, explain the positive externalities that are associated with the consumption of foods that promote ‘good health’. (9) note case study required to satisfy mark schemePaper 1, Section BExplain the negative externalities that are associated with the consumption of foods high in saturated. (15)Explain the positive externalities that are associated with the consumption of foods that are said to promote ‘good health’. (15) ................
................

In order to avoid copyright disputes, this page is only a partial summary.

Google Online Preview   Download