Case studies on market and government failure.

Market failure is the misallocation of resources resulting in either no equilibrium or an undesirable equilibrium from the perspective of society.  Is there one panacea governments can introduce to increase economic and social welfare or is it a combination of policies?  Is it a given that once government wield their magic wand all is remedied or can they actually worsen the situation? How many different types of government intervention can you spot?  Remember that examiners will credit candidates that use  their own examples.

making things worse            plastic bags at the supermarket       congestion charge and ped        fracking and some unit 2minimum price of labour     one more coke please    kuwait #1 for water consumption     subsidies in the gulf                   lift the ban       speed kills                                     KD 500 for not going to school         get advice early and reduce the opp cost


Looks like I’ll have to sell my other Ferrari!

ownership of cars limited

To reduce the negative externalities brought about by private transport, Kuwait plans to adopt a new policy limiting the amount of cars a household can own. The ‘genius’ (and there’s quite a bit of sarcasm here) solution that they’ve come up with is to limit the amount of cars a Kuwaiti can own to two, and an expat to one. Surely if they were truly looking out for the future generations, they would have it the other way around – it is the expats who need to be allowed the greater number of cars so that they’re able to drive to work, and do the jobs that the Kuwaitis cannot, and do not want to, do. The Kuwaiti Government plans to tax expats owning more than one car a fee of 100KD, but whether this is a one-time thing or not remains to be determined.
Kuwait is home to 2.2 million foreigners, making up two thirds of the country’s population. Of those foreigners, the ones who don’t own cars, or more than one car, are most likely to be unskilled workers and domestic helpers. Therefore, the tax burden will fall primarily on the skilled labourers, and should they decide to relocate,  the consequences of this brain drain could be very damaging to the Kuwaiti economy. But Kuwait’s got oil and money, so yolo.

(PS – since I haven’t heard a whole lot about this, I’m not sure how reliable the article is. Still, even if it isn’t true, it’s still something to keep in mind when answering a question about policies to reduce negative externalities of private transport; the evaluation part will be a breeze.)

Missing markets – Public Goods.

The characteristics of pure public goods are non excludability; non rivalry in consumption; and non rejectable (The collective supply of a public good for all means that it cannot be rejected by people, a good example is a nuclear defence system or flood defence projects.

There are relatively few examples of pure public goods. Examples include flood control systems, some of the broadcasting services provided by the BBC, public water supplies, street lighting for roads and motorways, lighthouse protection for ships and also national defence services.

Quasi-Public Goods

A quasi-public good is a near-public good i.e. it has many but not all the characteristics of a public good. Quasi public goods are:

Public goods and market failure

• Pure public goods are not normally provided by the private sector because they would be unable to supply them for a profit.
• It is up to the government to decide what output of public goods is appropriate for society.
• To do this, it must estimate the social benefits from making public goods available

The Free Rider Problem

• Because public goods are non-excludable it is difficult to charge people for benefitting form a good or service once it is provided
• The free rider problem leads to under-provision of a good and thus causes market failure

The case for government intervention in the case of public goods

* The non-rival nature of consumption provides a strong case for the government rather than the market to provide and pay for public goods.

* Many public goods are provided more or less free at the point of use and then paid for out of general taxation or another general form of charge such as a licence fee.

* State provision may help to prevent the under-provision and under-consumption of public goods so that social welfare is improved.

* If the government provides public goods they may be able to do so more efficiently because of economies of scale.

* Direct provision of a public good by the government can help to overcome the free-rider problem which leads to market failure

flood defences      lighthouse       cameras        private prisons        fireworks world record         park in the sky

Germany and the Minimum Wage

Until November 2013, a minimum wage in Germany did not exist yet unemployment was low, the economy strong; and German workers were renowned for strong job protection- perhaps this could mean a minimum wage is not entirely necessary. However the non-existence of a minimum wage led to some employees being paid terribly low wages; and this surely is a sign of inequality and hence market failure. Also, if a minimum wage did exist to prevent this, should wages be negotiated between workers and their industries or should one wage be set to cover all workers? If trade union bargaining power is deemed limited, maybe a national wage would be most effective.


minimum wage

Asymmetrical information, obesity and market failure!

Lack of information leads to less informed decisions being made and therefore an undesirable equilibrium and market failure. In this day and age is it possible for a smoker to not know the consequences of his/her action?  What about transfats?  According  to the BBC transfats account for 20 000 heart attacks and 7000 deaths in the UK each year .  What are transfats?

“Artificial trans fats are used both in processed food and in restaurants as a way to improve the shelf life or flavour of foods. The fats are created when hydrogen is added to vegetable oil, making it a solid.”

Did you know that up until August this year Mcdonald’s hamburgers were made of meat that was deemed unfit for human consumption.  To make the meat fit for human consumption they “washed” it in ammonium hydroxide!

The Tragedy of the Commons

– Part 1 – What happens when many people seek to share the same, limited resource? – Chalk Talk – Part 2 – Are there any solutions to The Tragedy of the Commons? – Chalk Talk – For the Khan Academy enthusiasts… 🙂

 Also, you may want to check out these real-life examples of the Tragedy of Commons…

I blame the Market! No wait… the Government!

The Free Market economic system isn’t perfect, and suffers from a variety of different failures eg. Income inequality, demerit goods, environmental issues (negative externalities) . That’s why countries have a Government – to correct these market failures. But hold on! What happens if the Government fails? Who do we point the finger at now? The Market, or the Government?

market and government failure

5 market failures