Market Failure What happens when the market doesn’t work?

1. Safety Nets Problem: – The market system creates winners and losers. The market doesn’t provide support for people who “lose” in the market. Definition: – Programs that help people when they are having problems. Why the market doesn’t deal with this: – There is no profit motive – People without money can’t participate in the market Examples: Homeless shelters: may be provided by government or a non-profit organization (a charity) – ***You get “something for nothing”***

Then there are “entitlement programs” You are “entitled” to them if you are a worker because you and/or your employer have paid into the system through taxes. So entitlement programs are safety nets because you get “something for something” “The Big Four”: Unemployment Insurance Social Security Medicare Medicaid Tax withholdings

Unemployment Insurance Your employer pays a % of your wages to the federal and state governments. All the money is pooled into a huge fund called the “unemployment insurance fund.” If you are laid off from your job, you may receive some money back from the fund, as long as you can prove you are “actively” looking for a new job. There is a limit to how long this lasts: currently almost 2 years.

Social Security You pay about 3% from your paycheck, your employer pays about 3%. You will receive a small monthly payment after you retire Created during the Great Depression

Quick History Fact The First Social Security Check

Medicare You pay about 1.5% of your paycheck, and your employer matches it. When you retire, you receive free or reduced price medical insurance

The Problem $18 Trillion (2015)

Medicaid Federal/state government program Basic health insurance for people with low incomes About 15% of Americans (46 million) Not an “entitlement” program – Why? – Paid for with state taxes, federal taxes

Other Safety Net Type Programs “Welfare”: general term for programs that help the poor TANF (Temporary Assistance for Needy Families): up to 2 years help, lifetime maximum of 60 months LEAP: Energy assistance (Nov. 1 – April 30)

Other safety net type programs Food stamps NY Times Interactive Map by County

Review Quiz  Give three examples of safety nets  Name two entitlement programs  Why doesn’t the market provide safety nets?  Do the costs of these programs outweigh the benefits?  Why are they called “entitlements”?

2. Negative externalities Problem: The market does not deal with external costs. Definition: External costs. When the decision made by one party negatively affects someone who isn’t making the decision. Examples: Pollution from a factory, sickness or injury caused by poor quality products

Negative externalities

Fracking Anyone?

Why the Market Doesn’t Deal with This Problem There are external costs. Producers don’t pay them, other people do. – It is cheaper to NOT deal with the problem. Fixing the problem will cost them money. – They won’t deal with it unless forced to (by the GOVT), or it is in their self-interest. – They may use it as a selling point.

Possible Solutions Government regulation to prevent the external cost, to minimize the external cost, or to shift the cost back onto the producers (internalize them) Educated consumers choose not to buy just products, but products with less external costs usually cost more (because they’re more expensive to produce).

Food and Drug Administration (The FDA) Established in 1906, same year The Jungle was published. Regulates food safety, pharmaceutical safety and effectiveness

Health inspectors : Surprise inspections Limits to contaminants in food and drugs “There is a whole FDA guideline list about how many insects, insect parts, insect eggs, rodent hairs, rodent feces are allowed in food…This stuff is ALLOWED in all food. It just has to be under a certain level.”

Other Regulatory Agencies Environmental Protection Agency (EPA) Consumer Product Safety Commission (CPSC) Nuclear Regulatory Commission (NRC)

Case Study: How Should Tobacco Be Regulated? Advertising? Candy flavored cigarettes? On TV and in movies? No smoking in public places? Taxed to make it more expensive? Should it NOT be regulated?

How Should Tobacco Be Regulated?

Case Study: Carbon Tax Carbon = present in all hydrocarbon fuel: coal, petroleum, natural gas When burned release as carbon dioxide CO 2 CO 2 is a “greenhouse gas” = contributes to global warming and climate change Proposal: Tax carbon emissions by companies/governments to solve the issue of climate change

Case Study: Cap and Trade (A Market Solution) Proposal: Governments put limits “caps” on the amount of pollution that can be emitted The “cap” is sold to companies as an emission “permit”; permits must equal the amount of their emissions Total number of permits can’t exceed “cap”

Which Do You Support?

Review Quiz Give an example of a negative externality. How could this type of market failure be addressed?