Demystifying Market Failures' hopefully Rebecca Riley Head of Research NWDA

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Demystifying Market Failures.(hopefully)Rebe
cca Riley Head of Research NWDA
What are todays objectives
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Objectives
Why are market and other failures important?
What are they?
How do we use it?
When do we apply them?

• Trying to make this simple and explaining the
  jargon

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Why do we need to know about market failure?

• It is behind the rationale for all government
  intervention
• Dealing with inefficiencies in markets or the
  achievement of an equity objective such as local
  or regional regeneration. HMT Green Book Annex 1
• Persistent regional differentials point to
  serious endemic market other failures in the
  UK regions. CSR07 RDA Impact Report (2006)

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Where should we look at Failure?
Evidence Failures analysis

• Outlining the project idea

No evidencedont do
Yes to both
Good evidence Failures analysis
Developing and Appraising
No to either- Exit
Yes to both
Did it meet the requirements of Failures analysis
Exit and Evaluation
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New idea?
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What is a market?

• A market is a social structure which allows
  people to exchange products or services

• People expect to be better off
• People have the right information

• A market is efficient when the price attracts as
  much demand as the market produces

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Market relationship
Producers
Consumers
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What are market failures?
..A failure of the market system to attain
hypothetically ideal allocative efficiency. This
means that potential gain exists that (for some
reason) has not been captured
A loaded and value-laden term
Market failure is a term used to describe a
situation in which markets do not efficiently
allocate goods and services.
a situation in which economic efficiency has
not been achieved through market mechanism.
a term used by economists to baffle us all
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What is market failure?
One producer or consumer has too much influence
on price
Individuals self-interest leads to bad results
for society
Markets can also fail if the activity is carried
out without the right information to get the best
return
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What causes market failure
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What isnt market failure.

• Private sector wont provide.
• Private sector wont invest
• Commercial rents are too low.
• Companies arent exporting.

If a company makes a rational decision based on
sound economic information there is no market
failure
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Types of Failure

• Public goods
• Externalities (or spillover)
• Imperfect information
• Market power/scale economies

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Our example for today. Cliff the Cowboy and
the Ezibuck Ranch

• Cliff owns a ranch, raises cattle, buys feed,
  pays vets and sells cattle.

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Public Goods

• Where a free market economy will fail to deliver
  the efficient quantity of public goods.
• Nonexcludable cant be paid for
• Non-rivalrous wont prevent others from using
• Examples?

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Ezibuck Ranch and Public goods

• Non-rival - Plains on which
• to graze, Air to breath
• Free ride Sheriff

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Externalities (Spillover)

• The effects of an activity which arent taken
  into account and we are not able to choose
  whether we take the effect
• Negative externality- Pollution, health impacts
• Positive externality - Taking on workers
• who have been trained elsewhere
• Examples?

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Cliff and his externalities

• Negative
• Cattle eating all the grass
• Methane gas
• River pollution
• Positive
• Taking on trained wranglers
• All the cattle in the area get vaccinated he
  doesnt have to vaccinate his
• His neighbour paints his ranch, Cliffs property
  price goes up

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Information Failure

• Where the decision maker doesnt
• have all or the right information
• to make a decision
• Information supplier may
• withhold information
• have inaccurate or out of date information
• Examples?

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Cliffs information failure

• Selling at wrong price because he doesnt know
  the market
• Not knowing the best place to sell
• He sells his cattle as a higher quality than
  they actually are

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Market Power

• Lack of competition in the market leading to..?
• BUT monopolies can be present locally but compete
  internationally, they may also have greater
  capability to fund research and development due
  to profits
• Examples?

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Market power and Cliff

• Large supermarket sets the price for his Beef
• Vets set the price for his cattle care
• Big Squeeze Ranch sets price for stud and calves

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Appropriate Public Sector intervention

• There are lots of interventions to address market
  and other failures

Command and control (regulation)
Subsidy and financial assistance (including
grants)
Taxation (direct and indirect)
Policies to increase competition
Provision of public goods
Introduction/expansion of market based incentives
to change both consumer and producer behaviour
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Take-away messages
Market other failures matter

• Its a useful tool to understand whats going
  wrong and why, it helps when developing options

Understanding what they are how they operate is
key to Understanding the strategic fit
Designing quality, appropriate
interventions Delivering best return from
investment
You dont need to be a specialist to understand
market you just have to look at the evidence
and think what might be causing the problem
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possibly reading more widely.

• HMT, The Green Book, Appraisal evaluation in
  central government, 2003 http//www.hm-treasury.go
  v.uk/media/A/7/Green_Book2_03.pdf
• Communities Local Government, Assessing the
  impact of spatial interventions The 3Rs
  Guidance, Appendix 4.1, 2004 http//www.communitie
  s.gov.uk/index.asp?id1142237
• OffPAT, Appraisal Advice Note 13 Market Failure,
  2004 http//www.offpat.info/content-download/AAN13
  20Market20Failure200420022004.pdf
• DTI, Public policy Using market-based
  approaches, 2005 http//www.dti.gov.uk/files/file3
  3706.pdf
• FSA, A guide to market failure analysis high
  level cost benefit analysis, 2006
  http//www.fsa.gov.uk/pubs/other/mfa_guide.pdf
• Regeneris, Framework for assessing public funding
  support, 2007