Unit 8. Market Failures

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Unit 8. Market Failures

• IES Lluís de Requesens (Molins de Rei)?
• Batxillerat Social
• Economics (CLIL) Innovació en Llengües
  Estrangeres
• Jordi Franch Parella

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Market Failures

• - It is claimed that markets fail sometimes and
  that the government can correct the failure
• 1) Externalities
• 2) Public Goods
• 3) Monopolies
• 4) Inequality
• 5) Crises
• 1), 2) and 3) refer to a misallocation of
  resources.
• 4) refers to an unqual distribution of resources
• 5) refers to a lack of stabilization

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Externalities

• Externalities are effects on others not
  contemplated within the price
• With a negative externality the social cost is
  greater than the private cost and the market
  overproduces (pollution)?
• With a positive externality the social benefit is
  bigger than the private benefit and the market
  underproduces
• Externalities exist because of a lack of clear
  property rights

4
Public Goods

• Public goods are non excludable (consumers cannot
  be prevented from consuming) and non diminishable
  (the consumption of A does not reduce the
  consumption of B)?
• Public goods suffer from the free rider problem
  and are usually provided by the public sector and
  not the private sector

5
Inequality

• What should the government do about economic
  inequality?
• Economic analysis alone cannot give us the answer
• The question is a normative one and not positive
• The richest fifth of the families earns about ten
  times as much as the poorest fifth
• Policies to help the poor include welfare,
  subsidies and in-kind transfers, minimum wages

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Inequality

• According to Utilitarianism (Jeremy Bentham and
  John Stuart Mill), the government should choose
  policies to maximize total utility of everyone
• Utilitarians would choose the distribution of
  income to maximize the sum the utility of every
  one in the society (an additional for the poor
  involves more utility than an additional for
  the rich)?

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Inequality

• According to social-democracy (John Rawls), the
  government should choose policies deemed to be
  just (evaluated by an impartial observer behind
  the veil of ignorance)?
• Public policy based on the maximin criterion (to
  maximize the utility of the worst-off person in
  society)?
• This idea considers the redistribution of income
  as a form of social insurance

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Inequality

• According to libertarianism (Murray Rothbard),
  the government should preserve private property,
  enforce voluntary agreements and punish crime,
  but should not redistribute income
• Libertarians argue that equality of opportunity
  is much more important than equality of income
  (formal equality but not material equality)?

9
Crises

• The world is suffering now a global crisis. Is
  the free market to blame? Or are the Central
  Banks and the policymakers to blame?
• Interest rates are artificially low, but saving
  is not high. What are the effects?
• The creation of money out of thin air is
  increasing. What are the effects?
• Commercial and saving banks have increased the
  credit without the backing of saving. What are
  the effects?

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Crisis

• - Housing Bubble Who is to blame?
• - Creation of money Who is to blame?