Externalities and market failure

How to fix market failure caused by monopolies?

ACCC, government subsidies, encourage more firms to enter the industry etc, anti monopoly legislations-media

Why do common property goods cause market failure?

Common property goods cause market failure because no one has individual ownership or control over the goods yet they can be used and exploited by all.

What are common property goods?

Common property goods share the non excludable characteristic of a public good, however they are rival in consumption. The ocean and the atmosphere are good examples. If you go fishing and catch a snapper does it have a price tag on its tail? Do you need to throw money into the ocean for it? Of course not! When common property goods such as fish are consumed, a negative externality is imposed on other consumers. Because the number of fish in the ocean is rival, overfishing can drastically reduce the available stock.

What is equity?

Equity is how fair the distribution of products between different members of society is.

What are regulations?

Everyone has the same restrictions and they enforced by laws and fines.

What is an externality?

Externalities exist when bystanders or third parties are affected by other peoples' economic decisions.

What is market power?

Firms have market power when they can affect the price by adjusting the output.

Examples of positive consumption externalities and what the government may do?

Flu Vaccinations, Education. The government may subsidise or encourage the consumption of these goods or services.

Government created failures?

Government created failure- no efficient equilibrium. Price ceilings, Price floors.

What are Price ceilings?

Government sets a maximum price to protect consumers. eg Water and energy. Done so that we pay less and consume more.

What are price floors?

Government sets a minimum price to protect producers. Eg minimum wage, taxis.

Why are externalities important?

If externalities that result from consuming a product are ignored, then the market demand curve for that product will be in the wrong place. If externalities that result from producing a product are ignored, then the market supply curve for that product will be in the wrong area.

How to fix market failure caused by common property goods?

Licenses Assign property rights (leases) Bag limits Rangers/inspectors Fines Awareness campaigns.

Four main causes of market failure?

Market (monopoly) power Externalities Public goods Common property resources

What is market failure?

Market failure occurs when resources are not being allocated efficiently- total economic surplus is not maximised.

What are property rights?

Property rights include: buying land or resources under the land, Lease land, rights and responsibilities. Eg. fishing areas

What are public goods?

Public goods are non rival in consumption and non excludable. This means that free riders cannot be excluded. Public goods are mainly provided by the government as there is no profit incentive for firms.

Why do public goods cause market failure?

Public goods cause market failure because the government uses our taxes to pay for and maintain the public goods, with no profit returns.

What are subsidies?

Subsidies are payment by the government to reduce costs to consumers or producers. Subsidies compensate for values not included in cost.

What are taxes?

Taxes are a compulsory government levy which internalise a negative externality. (user pays)

Government solutions to market failure- social optimums.

Taxes, subsidies, property rights, regulations, licenses.

What is the ACCC and what do they do?

The Australian Competition and Consumer Commission administer the competition and consumer act 2010. This act restricts the use of anti competitive methods and is set to protect consumers from greedy businesses.

What does the term anti competitive behaviour mean?

The term anti competitive behaviour refers to any agreements or arrangements between firms that seek to restrain competition in the market.

What is meant by tragedy of the commons?

The tragedy of the commons is an economic problem in which every individual tries to reap the greatest benefit from a given resource. As the demand for the resource overwhelms the supply, every individual who consumes an additional unit directly harms others who can no longer enjoy the benefits.

What are licenses?

There are licenses for things such as fishing to limit the number of fish caught etc.

Examples of positive production externalities and what the government may do?

Training workers, Renewable resources to produce energy. The government may grant subsidies to the producers to increase output and may also advertise.

Examples of negative production externalities and what the government may do?

Using fossil fuels to produce electricity,

Examples of negative consumption externalities and what the government may do?

Using mobile phone while driving, smoking in public. The government may tax or pass up laws and regulations to reduce the externality.

What is a cartel?

A cartel is formed when firms agree to collude or act together instead of competing against each other- this includes price fixing and market sharing.

What is market sharing?

A market is divided into a series of different smaller markets, each supplied by one of the firms, thus reducing competition.

What is a monopoly?

A monopoly is a market controlled by one firm.