marketfailure-141016154238-conversion-gate02-dikonversi.pptx

economic

1. Market Failure and the role of State 1

2. Things to be discussed 21- 2 What an externality is and show how it affects the market outcome • • Three methods of dealing with externalities Defining public good and explaining the problem with determining the value of a public good to society • How informational problems can lead to market failure Five reasons why a government’s solution to a market failure could worsen the situation •

3. Market Failures 21- 3 • Government failures are when the government intervention actually makes the situation worse • Market failure is a condition where the market is unable to achieve an expected result from the use of its resources. Market failure occurs because the market is unable to provide market needs efficiently so that they can be distributed optimally to the community

4. Causes of Market Failure When social costs exceed social benefits  (especially where negative externalities (external costs) are high). Over-provision of demerit goods   Under-provision of merit goods Lack of public goods   Immobility of resources Information failure Abuse of monopoly *  powers : 

5. Externalities 21- 5 • Externalities are the effects of a decision on a third party that are not taken into account by the decision-maker Negative externalities occur when the effects are detrimental to others Ex. Second-hand smoke and carbon monoxide emissions Positive externalities occur when the effects are beneficial to others Ex. Education

6. A Negative Externality Example 21- 6 • When there are negative externalities, the marginal social cost differs from the marginal private cost • The marginal social cost includes the marginal private costs of production plus the cost of negative externalities associated with that production It includes all the marginal costs that society bears

7. The Other example

8. A Positive Externality Example 21- 9 • When there are positive externalities, the marginal social benefit differs from the marginal private benefit • The marginal social benefit includes the marginal private benefit of consumption plus the benefits of positive externalities resulting from consuming that good It includes all the marginal benefits that society receives

9. The other example

10. Methods of Dealing with Externalities 21- 12 Direct regulation is when the government directly limits the amount of a good people are allowed to use Incentive policies • Tax incentives are programs using a tax to create incentives for individuals to structure their activities in a way that is consistent with the desired ends Market incentives are plans requiring market participants to certify that they have reduced total consumption by a certain amount • Voluntary solutions

11. Pub l i c Goods 21- 14 A public good is nonexclusive and nonrival Nonexclusive: no one can be excluded from its benefits Nonrival: consumption by one does not preclude consumption by others Many goods provided by the government have public good aspects to them •

12. Merit goods : goods which create a positive effect on the society and ought to be consumed more. Examples include schools and hospitals. The opposite is called demerit goods which include alcohol and cigarettes. External costs (negative externalities)  are the negative impacts on society (third-parties) due to production or consumption of goods and services. Example: the pollution from a factory.

13. Private costs  are the costs to the producer and consumer due to production and consumption respectively. Example: the cost of production. Private benefits  are the benefits to the producer or consumer due to production and consumption respectively. Example: the better immunity received by a consumer when he receives a vaccine. Social Costs = External costs + Private Costs Social Benefits = External benefits + Private benefits

14. Government Failures and Market Failures 21- 17 All real-world markets in some way fail • Market failures should not automatically call for government intervention because governments fail, too Government failure occurs when the government intervention in the market to improve the market failure actually makes the situation worse

15. Reasons for Government Failures 21- 18 Government doesn’t have an incentive to correct the problem Government doesn’t have enough information to deal with the problem Intervention in markets is almost always more complicated than it initially seems The bureaucratic nature of government intervention does not allow fine-tuning Government intervention leads to more government intervention