The Problem of the Free Rider Types of

The Problem of the Free Rider: Types of Goods and their Learning objective: - Be able to explain what is meant by ‘market failure’ in terms of the inefficient use of scarce resources. - Be able to define and explain different kinds of market failure (ideally in terms of a misallocation of scarce resources). - Consider different scenarios and apply economic concepts, terms and information appropriately KEY TERMS 1. 2. 3. 4. 5. 6. 7. Allocative efficiency Market Failure Perfect Information Asymmetrical information Moral Hazard Demerit goods Public goods STARTER: Why does the government help fund schools? If the government didn’t fund schools what do you think would happen? l In what way does the school system in the UK relate to market failure?

What are merit and demerit goods and why are they an example of market failure? Key Words Market failure - when markets don’t allocate resources efficiently. Perfect information – being in possession of information that completely eliminates uncertainty in a situation. Asymmetric information - when the people on one side of an economic transaction know more than the other. Moral hazard - when people’s behaviour is less careful than it could be, either because they believe that their carelessness will not be found out, or because they are encouraged to behave carelessly.

To what extent do markets allocate resources efficiently? EXAMINATIONA STYLE QUESTIONS EXAMINATION STYLE QUESTIONS 1. Market Failure Explain why negative externalities arising from an increase in air transport are an example of market failure (4 marks) Comment on why there is likely to be a market failure amongst consumers of processed red meat (6 marks) “…the division between the ‘haves’, who own houses, and the ‘havenots’, who do not, has been one of the most prominent market failures in the UK housing market” (Extract C, lines 10 – 12). In the light of this statement, evaluate the case for and the case against government intervention in the housing market in order to correct or to reduce market failures in such a market (18 marks)

What are externalities and why are they an example of market failure? What are Externalities? Costs to household e. g. Benefits to household e. g Benefits to energy producer e. g Costs to energy producer e. g. What are the external costs of producing energy with fossil fuels ? http: //www. youtube. com/watch? v=My. W 9 y. GV 1 Kqc

To what extent do markets allocate resources efficiently? Why is consumption of the barrier non excludable and non rival? Why might the Thames Barrier have free riders if it was left to the market mechanism to provide this good? Why would it be difficult for a firm to build the barrier and make a profit from doing so? Public Goods The Thames Barrier is an example of a good with public good properties. Public goods – those goods that have non excludable and non rival consumption. Non excludability: it is not possible to stop somebody consuming this good. Non rivallry: one person’s consumption does not affect the consumption of another person. It is difficult to charge people for using public goods (free riders). This creates a disincentive for firms to produce goods with these properties. http: //www. youtube. com/watch? v=OMp 2 f 4 Ll 540

To what extent do markets allocate resources efficiently? Public Goods Why does the BBC have public good properties? How does this explain the licence fee paid by everybody who owns a colour tv?

What are externalities are and why are externalities they and an example of market why are they an failure? example of market failure? Using supply and demand diagrams to Using supply and diagrams to illustrate market failures? illustrate market failures Price per unit of energy S 1 S P 1 P D Q 1 Q Quantity of Energy The In However, the diagram, if the also the external helps amount tocosts of energy of illustrate energy that the production would market befailure were consumed also created taken by into ifthe private existence account costs then ofand benefits, supply external would costs. alone, shift The were from external taken S to into. Higher S 1 costs account meancosts that is equal too would much to Q mean with of pricescarce that our price per unit would resources of energy increase are. P. to P 1 per unit and allocated to energy less energy production would be consumer and , energy is(Q 1). over consumed by Q – Q 1, if left to market forces alone.

What are externalities and why are they an example of market failure? Positive Externalities? Besides the entertainment provided for all of us by University Challenge, what positive externalities are created by people studying up to higher education? http: //publicecon. wikispaces. com/Positive+Externalities+and+Education

What are externalities are and why are externalities they and an example of market why are they an failure? example of market failure? Using supply and demand diagrams to Using supply and diagrams to illustrate market failures? illustrate market failures Price S P 1 P D Q Q 1 D 1 Quantity Energy However, if the external In the diagram, the amount The diagram also helps to of benefits of were alsofailure taken that would be consumed if illustrate the market into account then demand private costs and benefits, created by the existence of would increase from Dexternal to D 1. alone, were taken into account external benefits. The Higher would is equaldemand to Q with price equal benefits mean that notmean that increase to P 1 to P. priceofwould enough our scarce but also that would resources aremore allocated tobe and consumed (Q 1). , is under consumed by Q – Q 1, if left to market forces alone.

What are merit and demerit goods and why are they an example of market failure? CW Merit and Demerit goods Date: …………. Learning objective: Learn about merit and demerit goods. STARTER: http: //www. economicsonline. co. uk/Market_failures/Merit_ goods. html Why, if left to our own devices, would we spend less on healthcare than we should?

Whatare areexternalities merit and why are they an and demerit goods example of they market and why are failure? of an example market failure? Using supply and demand diagrams to Using supply and diagrams to illustrate market failures? illustrate market failures Price per unit of healthcare S P 1 P D Q Q 1 D 1 Quantity of healthcare The However, diagram if the also full helps benefits to of In the diagram, the quantity healthcare illustrate the were market known failure then of healthcare that would be demand created by would existence increase from ofto consumed ifthewe were left D merit toown D 1 goods. . devices Higher Notdemand enough our would be of would our scarce mean thatprice are would equal to Q resources with equal to increase allocated to to. P 1 the but production also that of P. more would merits goodsbe ; they consumed are under (Q 1). consumed by Q – Q 1, if left to market forces alone.

Whatare areexternalities merit and why are they an and demerit goods example of they market and why are failure? of an example market failure? Using supply and demand diagrams to Using supply and diagrams to illustrate market failures? illustrate market failures Price per unit of alcohol S P P 1 D 1 Q D Quantity of alcohol Without perfect knowledge The diagram also helps to of However, if the true benefits the benefits ofmarket alcoholfailure illustrate the of alcohol consumption were consumption, we consume createdthen by the existence of afall known demand could quantity equal to. To. Qmany with price demerit of from D togoods. D 1. Lower demand equal to P. resources our scarce would mean that lessare would allocated to the production of be consumed and price would demerits ; they are is fall until agoods new equilibrium over consumed by QP 1 – Q 1, establised with price andif left to market quantity Q 1. forces alone.

What is information failure and why can it result in market failure? CW Information Failure Date: …………. Learning objective: Learn about information failure. STARTER: What is a good price for these products? Why is not knowing what a good price is, a problem? What other examples can you think of, of situations where you have a lack of

What is information failure and why can it result in market failure? Information Failure and Market Failure What are the chances that, if you How can this, and the other smoke, you will be killed by a examples of information failure lead smoking related illness? to market failure? http: //www. patient. co. uk/health/smo king-the-facts

What is information failure and why can it result in market failure? What don’t we have information about? All of the options available in the present. The true benefits and costs of the options available. The future. There are knowns. These are things we know that we know. There are known unknowns. That is to say, there are things that we know we don't know. But there also unknowns. There are things we don't know.

What are externalities is and why are they an information example of why market failure and can itfailure? result in market failure? Using supply and demand diagrams to Using supply and diagrams to illustrate market failures? illustrate market failures Price per packet Of cigarettes P S P 1 D 1 Q D Quantity of cigarettes Without perfect knowledge However, if the true costs The diagram also helps toofof the costs of we smoking were known, failure then illustrate thesmoking market consume a quantity equal to Q demand could from Dof to created by thefall existence with price equal to P. would D 1. Lower demand information failure. To many mean lessresources would beare of ourthat scarce consumed and would fall allocated to theprice production of until a newgoods equilibrium is demerits ; they are established with by price and over consumed Q –P 1 Q 1, if quantity Q 1. forces alone. left to market