...Q1. Market failure occurs when resources are not allocated in the most efficient way to achieve highest possible social welfare. In a free market society certain goods and services would not be provided by the private sector as they would not be profitable enough for the companies producing them. As a result, society as a whole would suffer. The government steps in to provide the goods and services required by society that private firms will not provide. These public goods include street lighting, emergency services and public spaces eg parks. These services are paid for by the government which collects the funds through taxation. Merit goods are also funded or subsidised by the government. These are goods or services which people would generally not choose to pay for or think to save for which the government thinks are important ie education, libraries, NHS medical treatment. In the UK every child has the right to an education but many households would not be in a position to pay for it. Likewise, before all prescriptions were free in Scotland, there were still some who qualified for free prescription which were funded by the government ie low income households including those in receipt of certain benefits, elderly people of pension age, and children under the age of 16 or 16 and 17 year olds who were still in education. The presence of externalities can contribute to market failure where the actions of a firm leads to a greater social cost ie the presence of lead in car...
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...Why do markets fail? There are a number of reasons as to why markets fail and there are five different types of markets that this can be brought down to. These include: Monopoly, Collusion, Asymmetric information, Externalities and Public good and the free rider problem. Monopoly A monopoly can be seen as a form of market failure and this is because unlike in perfect competition, firms with large market power have the ability to inflate their prices as they are usually the ‘price-makers’. The price at which something will be sold is usually determined by the interaction of the supply and demand within the market. A monopoly can either set the selling price or quantities – but not both. The reason for this is because although they have a substantial amount of market power, they don’t have unlimited market power. Not only does the price depend on the actual market power of a firm, but it also depends on the actual demand of the good / service. The reason for this is because if the demand for a good / service was already low, but the firm decided to increase the price, then the demand would become even lower as customers may not be willing to pay that much. An explained graph of a monopoly can be found in the ‘imperfect competition’ section of the essay (Page 4). Perfect / Imperfect Competition Perfect competition Perfect Competition (Occasionally named Pure Competition) is when no competitor in the market has enough market power in order to attempt to rig the price of a...
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...Q 1. Cigarettes are often cited in economics texts as an example of a particular type of market failure. Identify that market failure, and illustrate the failure using an appropriate diagram. Ans. Cigarettes represents a market failure of externatilities. They are sited as negative externality as they affect the wellbeing of the bystander and the person neither pays nor receives any compensation for that negative effect. A smoker enjoys the puff of the smoke and the bystander inhales the fumes of the cigarette and indirectly suffers health hazards. And if the bystander fells sick because of the smoke as one reason he will not be compensated by the smoker for the ill- health and therefore, smoking has a negative impact on a person who has not paid for the cigarette and still has suffered a loss. This reduces the MSB by the extent of the negative effect on bystander; hence the socially efficient smoking is less than the free market level of smoking. A Negative Externality in Consumption can be analyzed by a decrease in the marginal social benefit of consumption below the marginal benefit to consumers. (If a smoker benefits $8.20 and non-smokers lose $4.00, then society as a whole benefits $4.20) S = MC D = MB 0 5,000 10,000 15,000 E Price of a pack of cigarettes Quantity of cigarettes $14 12 10 8 6 4 2 MSB MSB curve shifts downward by the amount of the externality --- the marginal external effect Q 2. Many economists believe that a Pigovian tax...
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...Contents Section 1 2 1.1 Market Failure 2 1.2 Public goods 2 1.2.1 Relation between Market failure and Public goods 2 1.3 Merit goods 2 1.3.1 Relation between Merit goods and Market Failure 2 1.4 Externalities 2 1.5 Imperfect competition 3 Section 2 4 2.1 UK government policy on the environment 4 2.2 About the policy 5 2.2.1 Water quality 5 2.3 Instruments the government use to achieve their policy 5 2.4 A justified evaluation of the performance of the policy in relation to its use within the UK 6 References 7 Section 1 1.1 Market Failure Market Failure is an economic situation where free market fails to allocate resources efficiently. It is the abbreviated situation in the any market where the curves of the quantities of the product demand and the quantities of the product supply do not match any equilibrium. This situation is called market failure. In addition, people are selfish that they produce goods and service in a business field, so it becomes market failure. The government have to intervene following reference namely public goods, merit goods, extremities and imperfect competition for improving market. 1.2 Public goods Public goods are about goods or services that can be consumed by everybody in a society, or may not produce at all. Public goods are non-excludable which stand for no one individual cannot be ineffectively kept out from using goods. Most of the public goods are served by government. (E.g. Street lightning). 1...
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...Government and its influence on the allocation of resources and affect on the economy cannot be overlooked, which makes the subject of Public Finance such an important field in the study of economics. Government is made by the people for the people, and therefore government has the power to control resources based on what the people want. Sure, people don’t like to pay taxes. People would rather keep all of their money and spend it in the way that they’d like. However, people also know how important social security, Medicaid, and other governmental programs are to their future, and therefore are willing to pay taxes in exchange for the goods and services the government provides to its citizens. Essentially, it all comes down to an economic comparison between one option (no taxes and no governmental programs) versus another option (taxes and governmental programs), and how much people are willing to pay (money, opportunity costs, etc.) for one option versus another. Because taxation by the government is such an important subject to everyone, Public Finance is truly an important subject that affects everyone and is an important subject for everyone to learn about, since it affects their overall well-being. By know more about voting, government allocation of resources, redistribution programs, and other important topics in Public Finance, people can make better decisions about who to vote for and people can have a bigger say and better knowledge about how the government affects...
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...Invisible hand, Market failure and Government intervention Invisible Hand Invisible Hand, term used in the book “The Wealth of Nations”, by classical economist Adam Smith, to characterize the idea that a guiding force leads individuals seeking their own economic self-interest to act in ways that also benefit society. A vindication of Adam Smith's intuition about the existence of an "invisible hand" bringing consistency and order to the chaos of individual actions - would be remarkable in them. Much of economic theory of the textbook variety is a celebration of the free market system. This celebration has two parts. First, the operation of the price system, in the context of competitive markets, leads to balance between the demand and supply of the different goods and services traded. In other words, flexible prices result in competitive markets clearing. Second, the market-clearing equilibrium - brought about through flexible prices and competitive markets - is a "good thing" in the sense that it is also a point of economic efficiency. In other words competitive outcomes are also efficient ones. The fact that competition leads to efficiency is known as the First Fundamental Theorem of Welfare Economics. The efficient outcome will have been brought about through parsimony in the use of information; the only things that individuals, in making their supply/demand decisions, need to know are the prices of the different commodities. Furthermore, since the efficient outcome...
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...A market failure is when there are not enough resources that are inefficiently allocated due to imperfections in the market mechanism. When a resource is inefficient it means the resources are not used in the best distribution by firms or organizations. An ETS is executed when the environment has been polluted and the government intervenes in order to control the pollution by providing economic encouragements towards the firms and organizations to reduce the amount of pollution emitted in the environment (Brown* 2001). When ETS is implemented it reduces the pollution of the environment caused by different firms thus making it its main goal. The type of market failure the ETS is addressing is the negative externalities. An externality is when the production or consumption of a good or service affects the third party with no consumption paid. The causes of an externality is when a market fails and leads to a lack of property rights, inadequate property rights or difficulty in implementing property rights in certain situations. Property rights are rights an individual or businesses have towards their property including the rights to buy or sell the property itself without the permission of anyone since it belongs to them. Positive and negative externalities are the two types of externalities. A positive externality is the benefits of the third party by the consumption or production of goods and services and they do not pay for it. However a negative externality is the production...
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...006 Pg. 18 Homework Question 8; a-f 8a. Regulating cable TV prices: Efficiency- This government policy corrects the market failure of market power, or a monopoly, that is often associated with the cable TV industry. 8b. Providing some poor people with vouchers that can be used to buy food: Equality- A difference in economic well-being means that poor people are not able to have access to necessities such as food. Granting vouchers to these individuals helps equally distribute economic shares. 8c. Prohibiting smoking in public places: Efficiency- Science has proved the dangers and health hazards associated with smoking. Because of these negative connotations, this government policy reflects efficiency, relating to a negative externality market failure. One person smoking in public can have a affect on another person who is also n the premise; hence smoking provides a negative externality on bystanders. 8d. Breaking up standard oil into several smaller companies: Efficiency- By breaking up the oil industry into smaller parts, society gets more benefits from its scarce resources. This policy corrects the market failure caused by a market power, or monopoly, in the oil industry. 8e. Imposing higher personal income tax rates on people with higher incomes: Equality- This government policy is helping to more evenly distribute economic well being throughout society. 8f- Instituting laws against driving while intoxicated: Efficiency- Drunk driving is an...
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...|Discuss the reasons why asymmetric information can be a source of market failure. Use examples to illustrate your answers. | |By Andrew Sweeting | |November 1998 | |Introduction | |This essay is concerned with the issue of information in microeconomics, particularly where information is a factor in the failure of| |individual markets in an economy. Economic information and its importance in microeconomics is initially discussed, and continues | |with defining asymmetric information, which is a factor that can lead to a market failure. | |In the analysis of asymmetric information in markets, ex ante and ex post asymmetries information are discussed in relation to market| |transactions. Ex ante asymmetric information can be explained through Adverse Selection in relation to quality of goods in the | |product market, and ex post asymmetric information can be explained through Moral Hazard in insurance markets. Strategies to correct | |market failure(s) caused by these information asymmetries is addressed for each example discussed. ...
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...Who does really pay for our Burgers? Institutional Causes, Effects and Solutions to the Meat Industry’s Contribution to Global Warming WHO DOES REALLY PAY FOR OUR BURGERS? 1. Introduction ‘All across the world, in every kind of environment and region known to man, increasingly dangerous weather patterns and devastating storms are abruptly putting an end to the long-running debate over whether or not climate change is real. Not only is it real, it's here, and its effects are giving rise to a frighteningly new global phenomenon: the man-made natural disaster’ (Obama, 2006). Global warming is one of the biggest threats to the environment and human well-being; today but even more for future generations. Global warming refers to the rise of the average temperature on earth. The greenhouse effect makes earth feasible for life. Without its protecting layer of several greenhouses gases (GHGs) such as carbon dioxide, methane or nitrous oxide, the average temperature on earth would not be a life-sustaining fifteen degree centigrade but minus six degree (FAO, 2006). By trapping part of the infrared radiation which would have otherwise bounced back into the cosmos, greenhouse gases keep the warmth. Adding to an ancient natural level human GHG, emissions have increased the amount in the atmosphere of e.g. carbon dioxide and methane since the beginning of the industrial revolution by 36 and almost 150 % respectively with an increasing tendency (EPA, 2007). While scientific research...
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...Chapter 4 The economics of Financial Reporting Regulation The case for unregulated markets for accounting information * Support for unregulated marketing all relate to the incentives for a firm to report information about itself to owners and to the capital market. * Agency theory explains why incentives exist for voluntary reporting to owners. * Wider voluntary reporting to the capital market is explained by signaling theory * The arguments supporting unregulated markets for accounting information are largely deductive in nature. Agency Theory * Predicts and explains the behavior of parties involved with the firm. * It conceives of the firm itself as a nexus of agency relationship and seeks to understand organizational behavior by examining how parties to agency relationships within the firm maximize their own utility. * One major relationship is between the management group and the owners of the firm. * Managers are hired to administer the firms’ activities. * Owners and Managers may have different goals and may not be in perfect agreement. While owners are interested to maximize return of investment and security prices, managers have a wider range of economic interests and psychological needs. Because of this conflict, owners communicate with managers in such a way as to minimize conflict between the goals of two groups. * Costs relating to monitoring management reduce managers’ compensation. Therefore managers have an...
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...product for less the cost of producing it. Burden of Taxation A tax paid by the supplier shifts the supply curve up by the amount of the tax. The loss of consumer and producer surplus from a tax is known as deadweight loss . Deadweight loss is shown graphically by the welfare loss triangle — a geometric representation of the welfare cost in terms of misallocated resources caused by a deviation from a supply/demand equilibrium. The cost of taxation includes the direct cost of revenue paid, lost surplus, and administrative cost. Interestingly, in terms of aesthetics, people have come to like the style of Paris roofs; it is one of the many things that makes Paris distinct. Including aesthetics complicates the analysis enormously. Economic reasoning is based on the architectural view that form follows function. Who Bears the Burden of a Tax? Taxes are like hot potatoes: Everyone wants to pass them on to someone else. Nobody wants to pay taxes, and there are usually large political fights about whom government should tax. For example, should the Social Security tax (mandated by the Federal Insurance Contributions Act, or FICA) be placed on workers or on the company that hires them? The supply/demand framework gives an unexpected answer to this question. Burden Depends on Relative Elasticity The person who physically pays the tax, however, is not necessarily the person who bears the burden of the tax. In reality, the tax burden is rarely shared equally because...
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...perform its economic role more efficiently? These are the central questions with which the economics of public sector is concerned. My main focus is addressing the conditions under which the public sector would be preferred to the private sector in the production of public services. The public sector is playing an ever growing, diversified and control role in the production of public services. My essay shows that there are good theoretical conditions for which the public sector is preferred in the production of public services. To map out this discussion, it is important I distinguish the ‘public sector’ and ‘public services’ although it is difficult to provide a sound definition. The public sector comprises the economic activities controlled by the government. Hence it is not subject to a competitive market and may lack incentives to control cost, provide good quality service and respond to customers’ needs. On the other hand, public services can be the set of services provided for a large numbers of citizens in which there are potentially significant market failures (broadly interpreted to include equity as well as efficiency) that justify government involvement, whether in production, finance or regulation (Grout and Stevens (2003). Conditions under which the public sector would be preferred to the private sector in the production of public services, which can be said to be the reasons for government provision/production varies for a number of reasons : * Market...
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...become known, provides an alternative to government regulation and provision of services and the importance of private property in his theorem. In his book The Economics of Welfare, Arthur C. Pigou, a British economist, asserted that the existence of externalities, which are benefits conferred or costs imposed on others that are not taken into account by the person taking the action (innocent bystander?), is sufficient justification for government intervention. He advocated subsidies for activities that created positive externalities and, when negative externalities existed, he advocated a tax on such activities to discourage them. (The Concise, n.d.). He asserted that when negative externalities are present, which indicated a divergence between private cost and social cost, the government had a role to tax and/or regulate activities that caused the externality to align the private cost with the social cost (Djerdingen, 2003, p. 2). He advocated that government regulation can enhance efficiency because it can correct imperfections, called “market failures” (McTeer, n.d.). In contrast, Ronald Coase challenged the idea that the government had a role in taking action targeted at the person or persons who “caused” the externality. He believed that government intervention did not necessarily lead to economic efficiency. In fact, it could lead to inefficiency and other/additional externalities. Unlike Pigou’s view of an assigning blame to the person(s) who caused the...
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...Economics is a social science that studies how individuals, governments, firms interact in allocation of resource, distribution of resources and transaction in the market. Public finance is said to be the center of economics that studies government activities in the economics and how government finances their expenditure. The span of government activities in a country are capitalist in which government activities are narrow, socialist where government undertakes most government activities and mixed economy in which the government takes a larger share of the economics activity. Externalities occurs in a situation where the buyer and seller do not take into consideration the effect of their action on third party or where there is a spillover effect on production process, externalities also occur when the right to use of environment is in dispute which means there is a need for property right. Which is the law created for firms, individuals for the use of a resource. Whenever there is an externalities and inefficient allocation of resource by private sector then market has failed to achieve efficiency also If the environment is regarded as being of value why does it suffer abuse? When and how does use of environment become abuse? The simple answer is that these problems are examples of a combination of various aspects of what is commonly known as market failure. These include missing markets, externalities, common property and other related effects. we can say, absence of...
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