Market Weaknesses Imperfect Information DEFINITION Buying or selling

Market Weaknesses

Imperfect Information • DEFINITION: Buying or selling with incomplete or erroneous info creates exchanges that are not beneficial. • EXAMPLE: Ineffective or harmful prescription drugs, loans with a deceptive interest rate.

Imperfect Information • GOVERNMENT INTERVENTION • Suits in court • Require disclosure of information • Regulate business practices and products.

Monopoly • DEFINITION: Only one seller of a good. No competition means they can raise prices and decrease output. • EXAMPLE: Microsoft? , De. Beers Diamonds, Utilities (gas, electric, telephone)

Monopoly • GOVERNMENT INTERVENTION • Break up the monopoly into multiple firms. • Force the firm to price competitively.

Externalities: Definition • • When an exchange hurts or helps a third party not directly involved in the exchange • External costs are imposed on someone without compensation • External benefits are received by someone without payment Problem: Goods with external costs are overproduced, goods with external benefits are underproduced

Externalities: Gov’t Intervention • Define property rights • Tax products with external costs • Subsidize products with external benefits

Externalities: Evaluate Intervention • Sometimes difficult to define or enforce property rights (air, for example) • Difficult to know how much SHOULD be produced

Public Goods • • A good with two characteristics: • Can be consumed by one individual without reducing the amount available for others • Very difficult to exclude nonpayers from consuming the good Examples: light house, national defense, radio and TV signals, war against international terror

Public Goods • • Weakness: • “Free rider” problem: Everyone has an incentive to consume without paying • Consequently the good is underproduced by the market (if at all) NOTE: Markets sometimes find ways to produce a public good (radio and TV through advertising)

Public Goods • Response: • Government collects taxes and provides the goods, especially national defense • • Note: Not all goods that the government provides are public goods Evaluation • Hard to know how much to produce • Few incentives to be efficient

Economic Injustice • The market distributes wealth in a way that is amoral (not necessarily immoral, it just doesn’t take into account what should be). • Often, we find it unfair when wealth is distributed based on factors such as: race, gender, family, luck, religion, etc.

Government Intervention • • Equality of Opportunity (evening out the starting line) • Anti-discrimination laws • Public Education • Scholarships Equality of Result (evening out the finish line) • Welfare • Social Security

Recession/Depression • The market economy goes through cycles • Output/employment rise and fall below what economy could produce with full employment • Measured by unemployment, GDP • above 5 or 6% is a recession, a depression is a severe recession • Recession/Depression caused by shocks to economy • ♣E. g. 9/11 Recession: downward spiral • ♣Housing Market Collapse in 2007 -08

Recession/Depression • • • Recession/Depression caused by shocks to economy • E. g. 9/11 Recession: downward spiral • Housing Market Collapse in 2007 -08 How has the current recession affected people? http: //www. nytimes. com/interactive/2009/03/ 03/us/20090303_LEONHARDT. html http: //www. nytimes. com/interactive/2009/04/ 02/business/economy-userphotos. html http: //www. nytimes. com/interactive/2009/11/0 6/business/economy/unemployment-lines. html

Government Intervention • • Fiscal Policy (Congress and the President) • Cut taxes (e. g. Bush Tax Cut Extension) • Increase government spending (e. g. Stimulus Bill) Monetary Policy (The Federal Reserve) • Increase money supply • Decrease interest rates