Please enable JavaScript.
Coggle requires JavaScript to display documents.
Market Failures - Coggle Diagram
Market Failures
Reasons for market failures
Merit and demerit goods
under/overconsumption of merit/demerit goods is due to ignorance, irrationality and irresponsibility
merit goods are goods that the government thinks will be under-consumed if left to the free market perceived private benefit<actual private benefit
e.g. education, healthcare, sports facilities, musuems
demerit goods are goods that the government thinks will be over-consumed if left to the free market because some people cannot factor in the full private costs
e.g. cigarettes, drugs
Imperfect Information
underestimate the harm negative externalities and demerit goods can be on others
e.g. smokers do not understand all the health risks that they and other second hand smokers may have
underestimate benefits enjoyed by others and by themselves
e.g. people may not understand the benefits of eating healthily on themselves and others
solutions
mandatory labelling
raise awareness through campaigns
protect consumer rights
Externalities
Private benefits are benefits enjoyed by consumers from consuming a good.
Private costs are the costs incurred by producers from producing a good.
Social benefits are the benefits enjoyed by society from the production and consumption of a good.
Social costs are the costs incurred by society from the consumption of production of a good.
Spill-over effects on third parties due to the production / consumption of the good
external costs - costs incurred by third parties due to the production / consumption of a good
external benefits - benefits enjoyed by third parties due to the production / consumption of the good
positive externalities
from consumption
healthcare: helps to cure someone from an illness, allowing the person to go back to work. not only does the person feel better, the employee and co-workers benefit from increased productivity of the person
education: the student has better prospects. people around him benefits as he indirectly educates them and improve their productivity.
from production
a farmer that produces honey benefits by earning money from selling the honey. Fruit farms around the bee farm also benefit as the bees help to pollinate the plants.
social benefits = private benefits + external benefits
when social benefits > private benefits, the good will be underproduced and under-consumed if left to the free market
solutions
subsidies
per unit
raises profitability, lowers price
lump sum/grants
used when the government wants a specific action to be taken
private sponsorship
tax rebates
which one?
healthcare: per unit
hospitals take in more patients
charge lower fees
(if we use grants, the hospital may choose not to pass down the benefits to its patient)
hospital buying equipment: grant
if per unit subsidy is used, the hospital may use money to pay its staff more or renovate the doctor's lounge
mixed: schools
per unit subsidies to lower school fees
grants to upgrade facilities
free provision
entire cost is financed by the state, price of good is reduced to zero
used when positive externalities are extensive
e.g. free vaccination against highly contagious diseases like tuberculosis
direct public provision
this is because private firms are profit-oriented and they only focus on maximising profits, neglecting the external benefits generated to society.
healthcare education etc.
schools and hospitals are built and run by the government
limitations: public organisations lack the incentive to minimize costs as they are not focused on profits, causing them to be more inefficient
reluctant to raise prices
not responsive to the needs and wants of consumers, causing inadequate and poor service quality
negative externalities
from consumption (e.g. passive smokers are at risk of health issues)
from production (e.g. factory emits toxic fumes, polluting the air and causing respiratory illnesses
full cost incurred by society (social costs=private costs + external costs)
when social costs > private costs, too much of the good will be consumed if left to free market
solutions
market-based approach
taxing the output
taxing the externality
command approach
quantity controls
rules and regulations
quota and bans
mix of both
tradeable permits
public awareness
Market Dominance
in monopoly and oligopoly
solutions
price control
nationalisation
antitrust
Public Goods
will never be supplied in the free market
Not possible to prevent a person who has not paid from consuming the good
the consumption of the good by one person does not diminish the quantity or quality available to others (non-rival)
e.g. national defence
Monopolistic competition
Similar goods
Low barriers of entry
No control over price
Many small firms
Pure competition
Low barriers of entry
identical
no control over price
many small firms
Oligopoly
Small number of firms, few are large
Fairly high barriers of entry
Same goods
Some control over price
Monopoly
Full control over price
Unique goods
One firm
High barriers of entry