Revision and Consolidation Microeconomics Market Failure

Market Power Key sources of market failure Externalities Merit / Demerit Goods Public Goods

Market Power Definition: The ability of a single (or a small group of) buyer / seller to have substantial influence on market price

Market Power Market failure: Market power in the product market: given their ability to control prices, firm ____ px  ______-consumption (allocative inefficiency)

Market Power Government intervention: Price control – AC or MC pricing Nationalisation Anti-trust laws / Competition laws

Negative Externalities Definition: The consequence of an economic activity that spills over to affect third parties whereby the costs of the action are not fully borne by the two parties engaged in exchange or by an individual engaging in a scarce-resource-using activity

Negative Externalities Market failure: Individuals consider only their private benefits and costs when making production and consumption decisions, ignoring the external costs of their action  _____-production / ______-consumption

Negative Externalities Government intervention: Pigovian taxes; subsidise alternatives Production quotas; cap and trade

Merit / Demerit Goods Definition: Merit goods are goods that have been deemed socially desirable through the political process Market failure: Under-provision (merit goods) / over-provision (demerit goods) by the private sector Government intervention: Merit goods – (1) subsidies, (2) state provision Demerit goods – (1) taxes, (2) state monopoly

Public Goods 2 key characteristics: Non-rivalrous Non-excludable Market failure: Free-rider problem  non-provision of public goods by the private sector Government intervention: State provision, funded by taxes

ACJC 2006 a.Explain why, in the absence of government intervention, water pollution results in an allocative inefficient outcome. (10) MSB ≠ MSC Welfare loss Negative externality 1.Definition 2.Who are those third party affected? How are they affected? 3.Explain the market failure caused by –ve externality 4.Graph to illustrate, highlight: Over-production Welfare loss

ACJC 2006 A Chinese government has closed 52 polluting factories in the Huaihe river basin in order to stop serious water contamination in the region. b.Assess whether shutting down of these factories is the best way to curb river pollution.(15) Limitations / ineffectiveness of policy? Are there undesirable side-effects? Are alternative policies better?

ACJC 2006 b.Assess whether shutting down of these factories is the best way to curb river pollution.(15) How does it work? Is it effective? Eliminates all pollution from the factories Is it desirable? While pollution is undesirable, the total elimination is equally undesirable. In fact, the socially optimum level of output allows for some degree of pollution. (graph)

Negative externality Quantity $ Demand = MPB = MSB Supply = MPC MSC = MPC + MECQPQP QSQS MEC S

ACJC 2006 b.Assess whether shutting down of these factories is the best way to curb river pollution.(15) Why it doesn’t make sense to shut down factories Pollution abatement clearly benefits society BUT Pollution abatement also involves costs In this instance, shutting down factories denies the society of the goods they produce. Pollution abatement is beneficial only in so long as the benefits of outweighs the costs.

ACJC 2006 b.Assess whether shutting down of these factories is the best way to curb river pollution.(15) Consider alternative policies 1.Pigovian tax / emissions fee 2.Tradable permits Explain how they work to get the pollution down to the socially optimum level. Comment on their strengths and their limitations Conclusion

NJC 2006 a.Distinguish between merit goods and public goods and consider under which of these classifications the tsunami predicting system should be placed.(12) Definition ? Example: education Merit goods are essentially private goods Rivalrous Excludable Using the example of education, explain why it is both rivalrous and excludable. Distinguishing characteristics Non-rivalrous Non-excludable

NJC 2006 a.Distinguish between merit goods and public goods and consider under which of these classifications the tsunami predicting system should be placed.(12) Merit goods are essentially private goods Rivalrous Excludable Implications Public goods  cannot be provided by private sector Merit goods  can still be provided by the private sector, just that … Distinguishing characteristics Non-rivalrous Non-excludable Note: Presentation of answers must be in the AB- AB format

NJC 2006 a.Distinguish between merit goods and public goods and consider under which of these classifications the tsunami predicting system should be placed.(12) Public Good Non-rivalrous Non-excludable Explain why the tsunami predicting system bears the 2 characteristics

NJC 2006 b.Discuss whether government intervention in dealing with positive externalities leads to an efficient use of resources.(13) Balanced argument with evaluative comments Thesis: Why govt intervention may be necessary 1. Definition of +ve externality 2. Explain the market failure caused by +ve externality 3. Graph to illustrate, highlight: * under-pdtn / under-cn * welfare loss Anti-thesis: Problems with govt intervention 1. Egs of govt intervention in dealing with +ve externality 2. Problems with govt intervention

NJC 2003 ‘Right now 5 million people in China have tuberculosis, 10% of people have chronic hepatitis B. Due to the lack of resources and attention, such silent epidemics are simply ignored.’ Daniel Chin, a World Health Organisation Official a.Explain how ‘silent epidemics’ may be viewed as sources of market failure. [12] Source of mkt failure: negative externality 1.Definition 2.Who are those 3rd party affected? How are they affected? 3.Explain the market failure caused by –ve externality 4.Graph to illustrate, highlight: (a) Over-production, (b) welfare loss

NJC 2003 b.To what extent can the government of China ensure an optimal allocation of scarce resource in the provision of health services? [13] Balanced argument with evaluative comments Thesis: Why govt intervention may be necessary 1. Relate to part (a)  healthcare can therefore be seen as a merit good with +ve externalities 2. Graph to illustrate, highlight: (a) under-production, (b) welfare loss Anti-thesis: Problems with govt intervention 1. Egs of govt intervention in dealing with +ve externality 2. Problems with govt intervention