Market Failure

overview

methods of resource allocation

  1. planned economy
  2. mixed economy
  3. free market

problems

  1. inefficiency in resource allocation
  2. inequitable distribution of income

efficiency

  1. allocative efficiency
  2. productive efficiency
  3. dynamic efficiency

(free market)

  1. PE
  2. AE
    -DD & SS framework: sum of PS and CS max, P=MC
    -MSB=MSC

causes

externalities

  1. negative externalities from production (petrochemicals)
  2. negative externalities from consumption (tobacco)
  3. positvie externalities from consumption (education)
  4. positive externalities from production (R&D)

information failure

imperfect information

  1. over-allocation of resources (SSB)
  2. under-allocation of resources (health screening)

asymmetric information

  1. adverse selection (insurance)
  2. moral hazard (insurance)

zero provison of public goods

  1. non-excludable
  2. non-rivalry in consumption
  3. non-rejectability

market dominance

  1. allocative inefficiency
  2. productive inefficiency
  3. dynamic inefficiency

immobility of factors of production

  1. occupational immobility
  2. geographical immobility

inequity and income inequality

inequitable distribution of essential goods and services

causes:

income inequality

representation

  1. excessivei income inequality
  2. high prices of essential goods and services
  1. Lorenz curve
  2. Gini coefficient

causes

  1. wage inequality
  2. income inequality (non wage income)

effects

  1. inequitable distribution of resources
  2. unequal access to opportunities
  3. other effects
    -mental wellbeing
    -drug abuse
    -crime rate
    -riots

government intervention

policies

taxes and subsidies (market-based policy)

taxes

  1. negative production externalities (indirect)
  2. negative consumption externalities (indirect)

subsidies

  1. positive production externalities (indirect)
  2. positive consumption externalities (indirect/direct)

government legislation and regulation

  1. negative consumption externalities (decrease MPB)
  2. postive consumption externalities (increase MPB)
  1. production quota (negative consumption externalities)
  2. tradeable Permits System

direct provision of goods underconsumed/produced

  1. joint provision (underconsumed -> increase SS)
  1. direct provision of public goods (missing market)

measures to regulate market dominance

  1. reducing barriers to entry (decrease DD, increase PED)
  1. Anti-trust laws (competition)
  1. regulations on standards of provison (increase quality)
  1. price regulation: MC or AC pricing policy (increase quantity)
  1. lump-sum tax to reduce excessive monopoly profits (increase equity)
  1. indirect subsidy to increase monopoly output towards AE o/p (increase quantity)
  1. nationalisation (equity, natural monopoly)

measures to manage information failure

  1. education and campaigns
    -imperfect information (increase DD)
    -asymmetric information (increase DD)
  1. laws to address asymmetric information
    -adverse selection in goods market
    -adverse selection in insurance (medishield)
    -moral hazard (partial payment)

factor immobility

  1. occupational immobility (training schemes)
  2. geographical immobility (improve transport network)

greater income equality & equity

  1. minimum wage law (increase income equality)

  2. increase productivity of workers


    -Workfare Training Support WTS


  3. reduce supply of low skilled workers (increase income equality)


    -higher levy for foreign workers

  4. direct tax (increase income equality)
  5. subsidies
    -cash benefits
    -benefits in kind

other policies

  1. price control in market for necessities (increase equity)
  2. government provision (increase equity)

Singapore context

solving traffic congestion and air pollution

  1. managing car usage - congestion charges: ERP (increase MPC)
  2. managing car ownership - quotas: COE (reducing qty)
  3. providing quality pubic transport system (increase PED for cars?)
    4.providing comprehensive road network and maximising its capacity
    -Expressway Monitoring Advisory System (EMAS)

govenment intervention in education

  1. legislation: complusory primary school education
  2. direct provision + subsidy
  3. direct subsidy: Edusave
  4. additional subsidies for low-income students: FAS
  5. other policies
    -making preschools better and more affordable: Early Childhood Centre Bill
    -supporting low-income families: Preschool Outreach Programme

government intervention in healthcare

1.subsidies: polyclinics + public hospitals

  1. Medisave
  2. medishield
  3. medifund
  4. Elderfund

reducing income inequality

  1. Progressive Wage Model (PWM)

government failure

  1. unintended consequences not addressed
  2. imperfect information
  3. inefficiency of government intervention
  4. time lags
  5. shifts in government policy
  6. rent seeking

application of behavioural economics (EAST)

  1. increasing salience (ATTENTION)
    -gory images on cigarettes packaging
  2. ensuring convenience (EASY)
    -vaccinations centres at local community centres
  3. appealing to loss aversion
    -taxing sugar vs healthcare subsidies
  4. social: social norms
  5. timely: approprate timing