Market Weaknesses

Imperfect Information DEFINITION: Buying or selling with incomplete or erroneous info creates exchanges that are not beneficial. EXAMPLE: Ineffective or harmful prescription drugs, loans with a deceptive interest rate.

Imperfect Information GOVERNMENT INTERVENTION Suits in court Require disclosure of information Regulate business practices and products.

Monopoly DEFINITION: Only one seller of a good. No competition means they can raise prices and decrease output. EXAMPLE: Microsoft?, DeBeers Diamonds, Utilities (gas, electric, telephone)

Monopoly GOVERNMENT INTERVENTION Break up the monopoly into multiple firms. Force the firm to price competitively.

Externalities: Definition When an exchange hurts or helps a third party not directly involved in the exchange External costs are imposed on someone without compensation External benefits are received by someone without payment Problem: Goods with external costs are overproduced, goods with external benefits are underproduced

Externalities: Gov’t Intervention Define property rights Tax products with external costs Subsidize products with external benefits

Externalities: Evaluate Intervention Sometimes difficult to define or enforce property rights (air, for example) Difficult to know how much SHOULD be produced

Public Goods A good with two characteristics: Can be consumed by one individual without reducing the amount available for others Very difficult to exclude nonpayers from consuming the good Examples: light house, national defense, radio and TV signals, war against international terror

Public Goods Weakness: “Free rider” problem: Everyone has an incentive to consume without paying Consequently the good is underproduced by the market (if at all) NOTE: Markets sometimes find ways to produce a public good (radio and TV through advertising)

Public Goods Response: Government collects taxes and provides the goods, especially national defense Note: Not all goods that the government provides are public goods Evaluation Hard to know how much to produce Few incentives to be efficient

Economic Injustice The market distributes wealth in a way that is amoral (not necessarily immoral, it just doesn’t take into account what should be). Often, we find it unfair when wealth is distributed based on factors such as: race, gender, family, luck, religion, etc.

Government Intervention Equality of Opportunity (evening out the starting line) Anti-discrimination laws Public Education Scholarships Equality of Result (evening out the finish line) Welfare Social Security

Recession/Depression The market economy goes through cycles Output/employment rise and fall below what economy could produce with full employment Measured by unemployment, GDP above 5 or 6% is a recession, a depression is a severe recession Recession/Depression caused by shocks to economy ♣ E.g. 9/11 Recession: downward spiral ♣ Housing Market Collapse in 2007-08

Recession/Depression Recession/Depression caused by shocks to economy E.g. 9/11 Recession: downward spiral Housing Market Collapse in 2007-08 How has the current recession affected people? http://www.nytimes.com/interactive/2009/03/ 03/us/20090303_LEONHARDT.html http://www.nytimes.com/interactive/2009/04/ 02/business/economy/economy-user- photos.html http://www.nytimes.com/interactive/2009/11/0 6/business/economy/unemployment-lines.html

Government Intervention Fiscal Policy (Congress and the President) Cut taxes (e.g. Bush Tax Cut Extension) Increase government spending (e.g. Stimulus Bill) Monetary Policy (The Federal Reserve) Increase money supply Decrease interest rates