1. Conditions for Market Efficiency: Perfect Information Translated from sessions from Dr. Pamela Starr as recorded by Teresa Hudock, CALIS

2. Create a 4 Square Chart Notebook Page 54: Title: Conditions for Market Efficiency: Perfect Information Top Left Quadrant: What the Market Does Well Top Right Quadrant: Market Failures Bottom Left Quadrant: What Government Can Do Bottom Right Quadrant: Problems with Government Intervention Leave space at the bottom for a summary

3. What the Market Does Well: The Market Creates Incentives: rewards (carrots) and consequences (sticks) The Law of Demand causes people to buy more or less based on price. The Law of Supply causes business to produce more or less based on price. There is a quest for efficiency (a market clearing price)

4. Market Failures Market failures cause the price of a good or service to not reflect the actual demand or supply. The laws of demand and supply are prevented from working. The market incentive is to keep secrets so your business can be the most successful while hopefully eliminating competition and taking advantage of customers. (remember the loaded dice?)

5. Market Failure 1. Externalities: the total cost of production is not calculated in the price (e.g. the cost of pollution clean-up is not included in the price of a polluting product) – Does the cost of our clothes include the costs for the air pollution and respiratory diseases created by the ships and trucks that transport them? – Why are gasoline and cars more expensive in California than in other places? – Find the answers to the above questions.

6. Market Failure 2. Lack of Competition: oligopolies (cartels), monopolies or any other concentration of production = higher prices – Oligopoly/Cartel: Oil Producing and Exporting Countries (OPEC) controls the oil production for the majority of oil exporting countries and can manipulate supply to get the price they want. – U.S. steel production and railroads in the 1800’s – U.S. Pharmaceutical Industry (each company has their specialty medicine and holds the patent for their medicine and can charge what they want.

7. Market Failure 3. Unions cause the cost of production to rise because unionized workers negotiate higher pay and better benefits for the employees. The market is distorted for the actual value of the employees and inefficiencies exist when the union workers are not able to be fired if they don’t do a good job.

8. Market Failure 4. Asymmetry of Information: incentive for producers to distort or withhold information. The more information I have as a producer and the less I tell my consumers, the more power I have and the more money I can make. – Do companies tell you that your clothes are made by child laborers in a sweatshop working 15 hours per day? If they did, would you buy the clothes?

9. Market Failure Asymmetry of Information con’t: – Are there incentives for businesses not to withhold information? What? Why? – How does this affect the subprime mortgage industry? Refer specifically to the Ameriquest case and the Crisis of Credit in the summary section on the bottom of your page.

10. What the Government Can Do: The Government can create regulations to require businesses share information. – E.g. labels with nutritional information (calories, ingredients, serving size etc.) – E.g. clothing labels with fabric information, directions for washing, country of manufacture etc. – Give an example:

11. Problems with Government Intervention 1.Taxation: Government can implement taxes on goods and services which raises the price. 1.Sales tax, luxury tax, tariffs, duties etc. 2. A gallon of gasoline includes lots of taxes 1.Find out how much in California and what the tax is designed to do. 2.How much is the tax on a pack of cigarettes and what is the tax designed to do? 3.Why do we tax foreign made cars?

12. Problems with Government Intervention 2. Subsidies: Money the government gives to encourage production keeping prices artificially low. a. Find out how much the government spends on farm subsidies. Why do they do this?

13. Problems with Government Intervention Price Controls: – What happens when the government makes the price of a good or service too low by setting a price ceiling? Why would they do this? Who does this favor? – What happens when the government makes the price of a good or service too high by setting a price floor? What would they do this for? Why would they do this? Who does this favor?