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

1. Safety Nets: The market doesn’t provide safety nets for people 2. Negative externalities: The market doesn’t deal with negative externalities (external costs). 3. Natural monopolies: The market doesn’t create natural monopolies 4. Non-profitability: If there is no potential for profit, the market won’t provide it 5. Equity/fairness: The market does not distribute goods and services equitably (some goods and services should be available to everyone equally).

1. Safety Nets O Definition: O Programs that help people when they are having problems. O Why the market doesn’t deal with this: O There is no profit motive O People without money can’t participate in the market O Examples: O Homeless shelters: may be provided by government or a non-profit organization (a charity)

Entitlement programs: O You are entitled to them if you are a worker because you and/or your employer have paid into the system through taxes

Unemployment insurance O Your employer pays a % of your wages to the federal and state governments. O All the money is pooled into a huge fund called the “unemployment insurance fund” O 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. O There is a limit to how long this lasts: currently almost 2 years

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

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

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

Other safety net type programs O “Welfare” : general term for programs that help the poor O TANF (Temporary Assistance for Needy Families): up to 2 years help, lifetime maximum of 60 months

Other safety net type programs O Food stamps

Review quiz 1. Give 3 examples of safety nets 2. Name 2 entitlement programs 3. Why are they called “entitlements”? 4. Why doesn’t the market provide safety nets? 5. Do the costs of these programs outweigh the benefits?

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

2. Negative externalities

Why the market doesn’t deal with this problem: O They are external costs. Producers don’t pay them; other people do. O It is cheaper to NOT deal with the problem. Fixing the problem will cost them money. O They won’t deal with it unless forced to, or it is in their self-interest. (they may use it as a selling point)

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

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

O Health inspectors : surprise inspections O Limits to contaminants in food and drugs O “There is a whole FDA guideline list about how many insects, insect parts, insect eggs, rodent hairs, rodent feces are allowed in food. It is really specific (x number of insect parts, but only x number of rodent hairs in a pound of wheat flour etc.). This stuff is ALLOWED in all food. It just has to be under a certain level.”

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?

What should be regulated? How much? What is the effect of too much regulation?

Other regulatory agencies O Environmental Protection Agency (EPA) O Consumer Product Safety Commission (CPSC) O Nuclear Regulatory Commission (NRC) O Many other federal and state government agencies

Review quiz O Give an example of a negative externality. O How could this type of market failure be addressed? O Give 2 examples of safety nets.