WEEK 3

Markets

Alternatives to market solutions - the role of government

You will learn about:
• ceiling prices, floor prices
• market failure - merit goods, public goods, externalities

You will learn to:
Examine economic issues

examine the forces in an economy that tend to cause prices to rise
identify reasons why government may intervene in certain markets

Apply economic skills

analyse non-equilibrium market situations and propose solutions to them
work in groups to investigate and report on the nature of competition within a specific industry.

Traditional economics sets out some basic premises. Let's think these through and see where they are happening in our everyday lives.
Write down these notes in your workbook.

Markets will usually provide a short-term response that satisfies most needs in a developed and stable economy
There are limits to markets, especially in areas that produce pollution and long-term detrimental effects on the environment
Governments are politically motivated and this can hamper their ability to provide remedies that address externalities of the market, including income inequality.

Government intervention in the marketplace

The following excerpt comes from Dixon, T. & O'Mahony, J. "The Market Economy" Pearson (2019), pp 109-110

Complete this 5 question quiz to show your understanding:

CORE ECON provides us further key information.
Read more here: https://core-econ.org/the-economy/book/text/12.html#129-market-failure-and-government-policy

Governments play an important role in the economy in their attempts to diminish the inefficiencies associated with many kinds of market failure. However, the same information problems can hamper a government seeking to use taxes, subsidies, or prohibitions to improve on the market outcome. For example, the French government eventually decided to ban the use of chlordecone rather than collect the information necessary to devise a tax on banana production or provide compensation to the fisheries.

Sometimes a combination of remedies is the best way to cope with these information problems and resulting market failures. An example is car insurance. In many countries, third-party insurance (covering damage to others) is compulsory to avoid the adverse selection problem that would occur if only the accident-prone drivers purchased insurance. To address the moral hazard problem of hidden actions, insurers sometimes require the installation of on-board monitoring devices so that prudent driving habits can be an enforceable part of the insurance contract.

This is a helpful summary on why markets fail:

Complete this table

Using these headings across your page, you will be analysing 6 decisions after considering each of the following aspects of the decision.

Here's an example:
Assume you travel to work by car, what happens? Each entry explains each of the directions in the headings.

Click on the link below to Core-Econ to access other examples.

In your table analyse the possible market failures associated with THREE decisions below.

CHOOSE FROM:

You inoculate your child with a costly vaccination against an infectious disease.
You use money that you borrow from the bank to invest in a highly risky project.
A fishing fleet moves from the overfished coastal waters of its own country to international waters.
A city airport increases its number of passenger flights by allowing nighttime departures.
You contribute to a Wikipedia page.
A government invests in research in nuclear fusion.

CORE-ECON

In each case, can you identify which markets or contracts are missing or incomplete?

Alternatives to market solutions