Transcript What is market failure

Starter: Are you awake?
Hidden in this picture are 75 tube stations? How many can you find?
What are we learning about today?
What do all these pictures have in common?
What is market failure
How can it happen?
Market failure occurs when scarce resources
are not allocated efficiently.
e.g. The price of something is too high or too
low and therefore too much of something is
consumed, or too little.
Complete and partial market failure
• Complete 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 price.
Externalities
• Prices & profits should be accurate signals –
however can be misleading
• May not reflect true prices and profits to
society of economic activities
Third-party
effects ignored
by the price
mechanism
Provision of public goods
• Market may fail to provide or underprovide
certain goods and services
• E.g. – in the provision of public goods –e.g.
defence, street lighting and policing
• People expect others to pay for such goods –
which if left to a free economy, would mean
they would be underprovided
Information gaps
• Do buyers and sellers have the same amount
of information?
• Asymmetric information – one party has more
information than the other
• This can lead to
consumers or
producers making
non-rational
economic
decisions
Information Failure
A used car salesman selling a
2002 VW Golf to an 89 year old
woman.
Failed market?
Lack of Competition
A pharmaceutical company,
has invented a new wonder
drug that cures short
sightedness. The drug is patent
protected.
Failed market?
Missing Market
There are over 1,400,000
streetlights in the UK.
Failed market?
Inequality
A middle aged woman pays
someone to pull her around on
a cart all day. The servant is
happy for the work, because he
has no alternative.
Failed market?
Factor Immobility
A group of coal miners have worked down
in the pit for their whole lives, as have their
family for generations. The mine has closed
down.
Failed market?
Externalities
A 36You
yearpay
oldsomeone
entrepreneur
to pull
owns
you a
bar.
around
She sells
on aover
cart £26,000
all day. He
of is
alcohol
happy every
for theweek.
work.
Failed
Failedmarket?
market?
What are the externalities?
How can it happen?
TASK: Research and
make a list of the
externalities of the
alcohol market. Try to
be as specific as
possible.