1.4 Market Failure

Does the Free Market ever FAIL to meet society’s needs?

(When the invisible hand (pictured) doesn’t work.) What is a market failure? A situation in which the free-market system fails to satisfy society’s wants. (When the invisible hand (pictured) doesn’t work.) Private markets do not efficiently bring about the allocation of resources. Too much of some things Not enough of others

Common Access Resources Common access resources - Resources that are not owned by anyone, do not have a price and are available for anyone to use without payment.

Common Access Resources Rivalrous – The consumption of these resources affects the ability of others to consume them (characteristic of private goods) Non-excludable – People cannot be restricted from consuming (characteristic of public goods)

Common Access Resources Sustainability – The ability of something to be maintained and preserved over time Cyrus sustainability What is environmental sustainability? What is economic sustainability?

Common Access Resources The inherent conflict Economy Environment Increase output produced and consumed Focusing only on this goal may result in environmental destruction Preserve the environment Focusing only on this goal may result in needs and wants not being satisfied

Common Access Resources

Common Access Resources Sustainable development – Development that meets the needs of the present without compromising the ability of future generations to meet their own needs.

Common Access Resources Price of harming the environment Problem: No price signal for environmental degradation How long would you be in the shower if there was no cost? Video Demand Q

Common Access Resources The use of fossil fuels to satisfy demand is a threat to sustainability. How? Show via diagram.

Pollution of Affluence Industrial production High-income consumption patterns Heavy use of fossil fuels Depletion of common access resources

Pollution of Poverty Pollution of poverty Lack of knowledge / tools High birth rates Over exploitation of land for agriculture Lack of resources to say ‘no’

Common Access Resources – Price signal A price signal Incentivises efficiency Punishes inefficiency Makes consumers and producers think more “What is common to the greatest number has the least care bestowed upon it” - Aristotle

Common Access Resources – Price signal EU Carbon Trading Video Energy efficiency incentive Governments control ‘supply’ of pollution

Common Access Resources – Govt responses Legislation – Restrictions on car emissions Catalytic converter requirements Restrictions on factory and production emissions Smokestack scrubber requirements Banning harmful substances (e.g. asbestos, CFCs) Hunting seasons/areas Fishing bag limits, size limits Development limits Protected areas (e.g. national parks, marine parks)

Common Access Resources – Govt responses Legislation – advantages Simplicity Can be very effective disadvantages No incentives to reduce emissions No incentives to increase energy efficiency No incentives to switch to alternative fuels Monitoring costs

Carbon Tax vs Cap and Trade Fixed price (as per Australia’s Emissions Trading Scheme) Certainty for investment No cap on emissions Market distortions not possible

Clean energy technologies The underallocation of clean energy technologies is an example of market failure. Show this in diagram form.

Clean Energy Technologies Mums and Dads consume clean energy

Clean Energy Technologies Firms research clean technologies How can we fix this market failure?

Correcting Positive Externalities Government provision Subsidies Advertising (consumption) Legislation (e.g. compulsory solar cells)

Common Access Resources The value of common access resources Video

Common Access Resources - pollution Explain, using negative externality diagrams, why the Black Sea might be more likely to be polluted than Lake Michigan. “What is common to the greatest number has the least care bestowed upon it” - Aristotle