Transcript AS Economics

The Problem of the Free Rider: Types of Goods and
their
Learning objective:
-
-
-
Be able to explain what is
meant by ‘market failure’ in
terms of the inefficient use of
scarce resources.
Be able to define and explain
different kinds of market failure
(ideally in terms of a
misallocation of scarce
resources).
Consider different scenarios
and apply economic concepts,
terms and information
appropriately
KEY TERMS
1.
2.
3.
4.
5.
6.
7.
Allocative efficiency
Market Failure
Perfect Information
Asymmetrical information
Moral Hazard
Demerit goods
Public goods
STARTER:
Why does the government help fund
schools?
If the government didn’t fund schools
what do you think would happen?
l
In what way does the school system in
the UK relate to market failure?
What are merit
and demerit goods
and why are they
an example of
market failure?
Key Words
Market failure - when markets don’t allocate resources efficiently.
Perfect information – being in possession of information that
completely eliminates uncertainty in a situation.
Asymmetric information - when the people on one side of an
economic transaction know more than the other.
Moral hazard - when people’s behaviour is less careful than it could
be, either because they believe that their
carelessness will not be found out, or because they
are encouraged to behave carelessly.
To what extent do
markets allocate
resources
efficiently?
EXAMINATIONA STYLE
QUESTIONS
EXAMINATION STYLE QUESTIONS
1. Market Failure
Explain why negative externalities arising from an increase in air
transport are an example of market failure
(4 marks)
Comment on why there is likely to be a market failure amongst
consumers of processed red meat
(6 marks)
“…the division between the ‘haves’, who own houses, and the ‘havenots’, who do not, has been one of the most prominent market failures
in the UK housing market” (Extract C, lines 10 –12).
In the light of this statement, evaluate the case for and the case
against government intervention in the housing market in order to
correct or to reduce market failures in such a market (18 marks)
What are externalities
and why are they an
example of market
failure?
What are Externalities?
Costs to household
e.g.
Benefits to household
e.g
Benefits to energy producer
e.g
Costs to energy
producer e.g.
What are the external costs of producing energy with fossil fuels ?
http://www.youtube.com/watch?v=MyW9yGV1Kqc
To what extent do
markets allocate
resources
efficiently?
Why is consumption
of the barrier non
excludable and non
rival?
Why might the Thames
Barrier have free riders if
it was left to the market
mechanism to provide this
good?
Why would it be difficult
for a firm to build the
barrier and make a profit
from doing so?
Public Goods
The Thames Barrier is an example of a good with public
good properties.
Public goods – those goods that have non excludable
and non rival consumption.
Non excludability: it is not possible to stop somebody
consuming this good.
Non rivallry: one person’s consumption does not affect
the consumption of another person.
It is difficult to charge people for using public goods
(free riders). This creates a disincentive for firms to
produce goods with these properties.
http://www.youtube.com/watch?v=OMp2f4Ll540
To what extent do
markets allocate
resources
efficiently?
Public Goods
Why does the
BBC have public
good
properties?
How does this
explain the
licence fee paid
by everybody
who owns a
colour tv?
WhatWhat
are externalities
are
and
why
are
externalities they
and an
example
of market
why
are they
an
failure?
example of
market failure?
Using supply and demand diagrams to
Using supply and diagrams to
illustrate market failures?
illustrate market failures
Price
per unit
of
energy
S1
S
P1
P
D
Q1 Q
Quantity of
Energy
The
In
However,
the
diagram
diagram,
if the
also
external
the
helps
amount
to
costs
of
energy
of
illustrate
energy
that
the
production
would
market
befailure
were
consumed
also
created
taken
by into
ifthe
private
existence
account
costs
then
ofand
benefits,
supply
external
would
costs.
alone,
shift
The
were
from
external
taken
S to
into. Higher
S1
costs
account
meancosts
that
is equal
too
would
much
to Q
mean
with
of
pricescarce
that
our
price
per unit
would
resources
of energy
increase
areP. to
P1 per unittoand
allocated
energy
less energy
would be consumer
production
and , energy
(Q1).is
over consumed by Q – Q1, if
left to market forces alone.
What are externalities
and why are they an
example of market
failure?
Positive Externalities?
Besides the entertainment
provided for all of us by
University Challenge, what
positive externalities are
created by people studying up
to higher education?
http://publicecon.wikispaces.com/Positive+Externalities+and+Education
WhatWhat
are externalities
are
and
why
are
externalities they
and an
example
of market
why
are they
an
failure?
example of
market failure?
Using supply and demand diagrams to
Using supply and diagrams to
illustrate market failures?
illustrate market failures
Price
S
P1
P
D
Q
Q1
D1
Quantity
Energy
However,
In
the
diagram,
if the
external
the
amount
The
diagram
also
helps
to of
that
benefits
would
of
be
were
consumed
alsofailure
taken
if
illustrate
the
market
private
into
account
costs
then
and
benefits,
demand
created
by the
existence
of
alone,
would
increase
were
taken
from
into
Dexternal
to D1 .
external
benefits.
The
account
Higher
is
equalthat
would
to Q
with
mean
benefitsdemand
mean
not
price
that
price
equal
to P.scarce
increase to
enough
ofwould
our
P1
but alsoare
that
more would
resources
allocated
to and
be
(Q1). by Q –
, isconsumed
under consumed
Q1, if left to market forces
alone.
What are merit and
demerit goods and
why are they an
example of market
failure?
CW
Merit and Demerit goods
Date:………….
Learning objective:
Learn about merit and
demerit goods.
STARTER:
http://www.economicsonline.co.uk/Market_failures/Merit_
goods.html
Why, if left to our own
devices, would we
spend less on
healthcare than we
should?
What
Whatare
areexternalities
merit
and
why
are
they an
and demerit goods
example
of they
market
and
why are
failure?of
an example
market failure?
Using supply and demand diagrams to
Using supply and diagrams to
illustrate market failures?
illustrate market failures
Price
per unit
of
healthcare
S
P1
P
D
Q
Q1
D1
Quantity of
healthcare
The
However,
diagram
if the
also
fullhelps
benefits
to of
In the
diagram,
the
quantity
healthcare
illustrate
the
were
market
known
failure
then
of healthcare
that
would
be
demand
created
by
would
existence
increase
from
ofto
consumed
ifthewe
were left
D
merit
toown
D1
goods.
.devices
Higher
Notdemand
enough
our
would
be of
would
our
scarce
mean
that
price
are
would
equal
to
Q resources
with
price
equal
to
increase
allocated
to
toP1
the
but
production
also that of
P.
more would
merits
goodsbe
; they
consumed
are under
(Q1).
consumed
by Q – Q1, if left to
market forces alone.
What
Whatare
areexternalities
merit
and
why
are
they an
and demerit goods
example
of they
market
and
why are
failure?of
an example
market failure?
Using supply and demand diagrams to
Using supply and diagrams to
illustrate market failures?
illustrate market failures
Price
per unit
of
alcohol
S
P
P1
D1
Q1
Q
D
Quantity of
alcohol
Without
perfect
knowledge
The diagram
also
helps
to of
However,
if the
true
benefits
the
benefits
ofmarket
alcoholfailure
illustrate
the
of
alcohol
consumption
were
consumption,
we
consume
createdthen
by the
existence
ofa
known
demand
could
quantity
equal
toTo.QLower
with price
demerit
many
of
fall
fromgoods.
D to D1
equal
to P.
our scarce
resources
demand
would
meanare
that less
allocated
to the production
of
would
be consumed
and price
demerits
they are
would
fallgoods
until a; new
over consumed
by Q – Q1,
if
equilibrium
is establised
with
left toP1
market
forces alone.
price
and quantity
Q1.
What is information
failure and why can
it result in market
failure?
CW
Information Failure
Date:………….
Learning objective:
Learn about
information failure.
STARTER:
What is a good price
for these products?
Why is not knowing
what a good price is, a
problem? What other
examples can you think
of, of situations where
you have a lack of
What is
information
failure and why
can it result in
market failure?
Information Failure and Market Failure
Whatcan
arethis,
the chances
that, if you
How
and the other
smoke, you
be killedfailure
by a lead
examples
of will
information
smoking
to
marketrelated
failure?illness?
http://www.patient.co.uk/health/smo
king-the-facts
What is
information
failure and why
can it result in
market failure?
What don’t we have information about?
What don’t we have
information about?
All of the options
available in the present.
The true benefits and
costs of the options
available.
The future.
There are known knowns. These are
things we know that we know. There are
known unknowns. That is to say, there
are things that we know we don't know.
But there are also unknown unknowns.
There are things we don't know we don't
know.
What What
are externalities
is
and
why
are
they an
information
example
of why
market
failure
and
can itfailure?
result in
market failure?
Using supply and demand diagrams to
Using supply and diagrams to
illustrate market failures?
illustrate market failures
Price
per
packet
Of
cigarettes
S
P
P1
D1
Q1
Q
D
Quantity of
cigarettes
Without
perfect
knowledge
However,
if the
true
costs
The diagram
also
helps
toofof
the
costs of
we
smoking
were
known,failure
then
illustrate
thesmoking
market
consume
a quantity
equal
to Q
demand
could
from
Dof
to
created by
thefall
existence
with
price equal
to P.would
D1
. Lower
demand
information
failure.
To many
mean
lessresources
would beare
of ourthat
scarce
consumed
and
would of
allocated to
theprice
production
fall
until agoods
new equilibrium
demerits
; they are is
established
with by
price
and
over consumed
Q –P1
Q1,
if
quantity
Q1. forces alone.
left to market