2. What is Market Failure?  When the market system (supply and demand) fails to meet peoples needs or wants, or it fails to do it efficiently.  Why does the market fail?  Either because it is not practical, or because it is not profitable

3. Natural Monopoly  Problem: The market doesn’t create monopolies naturally when it should. Sometimes competition IS the problem.  Definition: Situation where it makes sense for only one business to provide a good or service, usually because the cost of starting up the business is very high. Prices are regulated by the government.  Examples: UTILITIES: electricity companies, water, sewers/waste management

4. If competition were allowed?  There would power lines, sewer systems, water lines all over the place.  Difficult or impossible for a consumer to switch to another company.

5. How it works: (Why don’t they raise the price?)  Cannot raise their prices without approval by the Colorado state Public Utilities Commission (PUC)  PUC allows them to make a certain percent in profit.

6. Problems with monopolies?  No competition, so no incentive to: innovate (come up with new products) Provide good service Change what they’re doing

7. Non-Profitability  Problem: If there is no potential for a good or service, the market won’t provide it.  Some things need to be provided because they are a “public good”

8.  Goods and services that are provided by the government for various reasons: It would be non-profitable It would not be safe The market wouldn’t provide the good equitably (fairly) Textbook definition: ○ Non-excludability (can’t keep non-payers from using it) ○ The cost of adding new users doesn’t change the cost of production Public goods

9.  Examples: Army Large hydroelectric dam Roads National Parks Some types of R & D (research and development) 4. Non-profitability Why the market doesn’t provide it Dangerous! (and non-profitable) Too expensive! Inefficient use of land (competing roads),expensive (and fairness) Non-profitable Non-profitable (remember fracking technology was developed by federal gov’t research)

10.  Have government provide these goods and services Problems? ○ Gov’t doesn’t have incentive to save money: they are using tax dollars ○ Lack of competition leads to inefficiency, poor quality  Allow gov’ts to build it, let private companies run/maintain it. Problem: private business gets the profit without paying the cost Possible Solutions

11. subsidy  When the government works together with private companies by providing incentives for companies to produce a certain product or service

12. 5. Equity / Fairness  Problem: The market does not distribute goods and service equitably  Some goods and services should be available to everyone equally

13. How does public education help society?  Educated population necessary for democracy  Educated workforce more productive than non-educated  Education leads to higher pay: people spend more money to keep economy going  What would be the cost to society of a large uneducated lower class?

14. Fairness  Should electricity be a public good?  Internet access?  Public roads?  Public parks and playgrounds?  Post office?  Health care?  Public education? What if all people had / didn’t have these services?

15. How Does Public Education Help Society?  Educated population necessary for democracy  Educated workforce more productive than non- educated  Education leads to higher pay: people spend more money to keep economy going  What would be the cost to society of a large uneducated lower class?

16. If left to market forces?  Public goods and services that are currently available to everyone equally would become something you have to pay for  Not all people could pay  Services would not be available where not profitable (esp. rural communities, poor neighborhoods)

17. Private schools

18. Holy Family  Tuition for the 2012-2013 school year is $8,300 for Catholics who are recognized and registered members of a Catholic parish. $9,600 for non-Catholics and for Catholics who are not registered members of a Catholic parish.  Holy Family awarded over $800,000 in tuition assistance and scholarships for the 2012-2013 school year.

19. Public Goods Trade-Off  Gain some equity/fairness and stability  Lose some economic freedom, efficiency, innovation

20. 1. Safety Nets: the market doesn’t provide safety nets for people  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 gov’t or a non- profit organization (a charity)

21. 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

22. Marital Status and Child withholdings Tax withholdings Retirement and other deductions (gas, tolls, health savings account) Net pay !

23. 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

24. 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

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

26. The Problem

27. Medicaid  Not an “entitlement” program  Federal/state gov’t program  Basic health insurance for people with low incomes  About 15% of Americans (46 million)  Paid for with state taxes, federal taxes

28. 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  Food stamps

29. 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?

30. EXTERNALITIES

31. 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

32. WHY THE MARKET DOESN’T DEAL WITH THIS PROBLEM: They 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, or it is in their self-interest. (they may use it as a selling point)

33. POSSIBLE SOLUTIONS: Gov’t 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 the products, but products with less external costs usually cost more (because they’re more expensive to produce).

34. FOOD AND DRUG ADMINISTRATION (THE FDA) Established in 1906, same year “The Jungle” was published. Regulates food safety, pharmaceutical safety and effectiveness

36. 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. 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.”

37. WHAT SHOULD BE REGULATED? HOW MUCH? WHAT IS THE EFFECT OF TOO MUCH REGULATION?

38. 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?

39. HOW SHOULD TOBACCO BE REGULATED?

40. OTHER REGULATORY AGENCIES Environmental Protection Agency (EPA) Consumer Product Safety Commission (CPSC) Nuclear Regulatory Commission (NRC) Many other federal and state government agencies

41. REVIEW QUIZ Give an example of a negative externality. How could this type of market failure be addressed?