1. Market Failure

2. Business Responsibility
Responsibility to produce, often dangerous products, safely and responsibly is a key consideration for many firms.

3. Utopia
Social Efficiency = where external costs and benefits are accounted for
We are particularly interested in Social Efficiency

4. Externalities - Mind Map

5. Market Failure
Definition: Where the market mechanism fails to allocate resources efficiently.

6. Market Failure Market Failure occurs where: Resource immobility
Services/goods would or could not be provided in sufficient quantity by the market
Existence of external costs and benefits
Inequality exists
Let’s look at each one in turn

7. Market Failure Resource Immobility
Factors of production are not fully mobile
Labour immobility – geographical and occupational
Capital immobility – what else can we use the Channel Tunnel for?
Land immobility – cannot be moved to where it might be needed, e.g. London and South East!

8. Market Failure 2. Inadequate Provision:
Merit Goods – Could be provided by the market but consumers may not be able to afford or feel the need to purchase – market would not provide them in the quantities society needs
Sports facilities?
Second factor

9. Market Failure Merit Goods
Education – nurseries schools, colleges, universities – could all be provided by the market but would everyone be able to afford them?
Schools: Would you pay if the state
did not provide them?

10. Higher Education – Market forces or Market Failure?
Case study
Higher Education – Market forces or Market Failure?

11. Market Failure 3. External Costs and Benefits External or social costs
The cost of an economic decision to a third party
External benefits
The benefits to a third party as a result of a decision by another party
This our third factor

12. Market Failure External Costs
Decision makers do not take into account the cost imposed on society and others as a result of their decision
e.g. pollution, traffic congestion, environmental degradation, depletion of the ozone layer, misuse of alcohol, tobacco, anti-social behaviour, drug abuse, poor housing

13. Market Failure External benefits –
by products of production and decision making that raise the welfare of a third party
e.g. education and training, public transport, health education and preventative medicine, refuse collection, investment in housing maintenance, law and order

14. Market Failure 4. Inequality: Poverty – absolute and relative
Distribution of factor ownership
Distribution of income
Wealth distribution

15. The Environment Market failures environment as a common resource
externalities
ignorance
inter-generational problems

16. The Environment Policy alternatives
charging for use of the environment
emissions charges
user charges
optimum charge = external cost

18. The Environment Policy alternatives green taxes and subsidies
use of such taxes around the world

19. Green tax revenues as a % of GDP
Green taxes are levied on resource use
or polluting environmental emissions

20. Green tax revenues as a % of GDP

21. Revenue from environmentally related taxes as % of GDP

22. Government Intervention: Green Taxes and Subsidies
The use of green taxes and subsidies to correct externalities
the optimum size of a tax?
the optimum size of a subsidy?

23. Video Clip from Channel 4 on Green Taxes

24. The Environment Policy alternatives
charging for use of the environment
emissions charges
user charges
optimum charge = external cost
green taxes and subsidies
use of such taxes around the world
laws and regulations
advantages and disadvantages
education
tradable permits

25. The use of laws and regulation
Advantages of legal restrictions
simple to understand
safer when size of problem is potentially great
quick to implement
a good way of dealing with imperfect information
Disadvantages of legal restrictions
a 'blunt weapon'

26. More or Less Intervention?
Should there be more or less intervention in the market?
important to consider both costs and benefits of intervention
moral issues
problem of predicting effects of intervention
Loss of the advantages of the free market
some automatic adjustments
dynamic advantages of capitalism
judging the arguments

27. Conclusion How much can we rely on governments?
governments must have the will to protect the environment
depends on attitudes of various interest groups
must be able to identify problems and appropriates solutions
when problems are global:
may require international agreements
governments are likely to be more concerned with their own national interests