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Causes of Market Failure (Monopoly power (Monopoly Power can come from…

- - - - For example take the demerit tobacco, many young people become addicted to tobacco in teenage years through peer pressure and personal circumstance. Individuals take into account the short term costs and benefits but may undervalue or ignore the long term private costs/ benefits due to a lack of information.
      - On the other hand, merit goods such as preventative dentistry. The long term private benefits of using this service outweigh the cost of regular check ups. However, many ignore this and decide not to consume the service due to the short term costs this introduces (time, money charged by dentist, unpleasant experience). In the long run the cost is rotten teeth or gum disease which is worse than going to the dentist more 'when I was younger'
- - - - Horizontal integration
        
        Two firms join at the same stage of production. E.g. Disney and Pixar merged with Marvel
      - Vertical integration
        
        Where a firm integrates with different stages of production.
        
        Forward vertical integration
        
        Firm integrates with another further in the supply chain. E.g. Dick Lovett and Mini
        
        Backward vertical integration
        
        Firm integrates with another in a previous stage of the supply chain. E.g Netflix who have started manufacturing their own films
  - - - Resource misallocation occurs because too little is being produced and consumed at too high a price. This is resulting in a welfare loss to society where many are reducing their consumption as a result e.g. oligopoly gas and electricity companies increasing prices so that the elderly are not heating homes at winter.
      - Monopolies result in a dead-weight welfare loss to society as shown by the diagram
- - - - A demerit good would be one where the social costs to the community as a result of the consumption of the good exceed the private costs incurred by the consumer. This is because consumption by an individual, produces negative externalities that harm the wider community. Examples of de-merit goods include tobacco and alcohol. The overproduction and consumption of demerit goods also leads to market failure
    - - Merit goods include healthcare and education for which the social benefits of consumption exceed the private benefits. Markets provide these goods although often in the ‘wrong’ quantity. This leads to partial market failure
  - - - The provider of a positive externality (e.g. nice view) cannot charge a price to free riders who enjoy it. A positive externality has a greater social than private benefit.
    - - The unwilling receivers of a negative externality (e.g. pollution) cannot charge a price for the polluter. The social costs of negative externalities are much greater than the private costs.
- - - - ‘What is common to the greatest number gets the least amount of care’ Aristotle
      - An open access field of cows has a carrying capacity of 8. If more than 9 cows are added the grass cannot regrow which actually lowers the carrying capacity to say 6, and the cows are less healthy producing products of a lower quality reducing profits. Therefore, it is in the farmer’s best interests to keep the number of cows at carrying capacity.
        
        Each individual farmer gets the direct income from each animal, but all farmers share the cost of the degraded grass. If a farmer adds another cow it will reduce the health of all cows in the field although that farmer will come out ahead as he has more direct sources of profit. Every farmer acts under these incentives and will keep adding animals.
        
        If one farmer decided to boycott the field for its conservation another farmer would just come in. The field will not be around for ever, so they see no point in protecting it and just try to use it before everyone else.
        
        The tragedy of the commons assumes no communication. The management of global greenhouse emissions faces the same problems due to large area of land that is involved and cultural/ language barriers.
        
        If the field was privately owned the farmer chose to add another animal, they would only be hurting themselves and so this is an argument for privatisation.