Market failures externalities and public goods. The main types of market failures. Types of market fiasco
Market failures: in the case of market power in the presence of externalities in the production of public goods in the case of asymmetric information. Ways to solve problems of externalities: Internalization of externalities. a For example, if, to eliminate negative externalities, the state introduces a tax withholding in the amount of marginal external costs, then the domestic costs of the producer will increase and bring output in line with the socially optimal.
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Failures, or fiasco of the market. Externalities and the market.
Failures, or fiasco, of the marketcall such cases when there is an inefficient allocation (or allocation) of resources. The market fails = the price does not reflect all costs, or the market cannot produce any goods.
Market failures (fiasco):
- in case of market power
- with external effects
- in the production of public goods
- in case of asymmetric information.
External effects (externalities)- these are the costs or benefits from the production or consumption of any goods for third parties not participating in the transaction.
Externalities disrupt the market mechanism.
Conditions for Achieving a Socially Efficient Output:
MSU=MSC,
where MSU - marginal social utility
and MSC marginal social cost.
Negative externalities generate overproduction in a competitive market, while positive externalities generate underproduction.
Ways to solve problems of externalities:
- Internalization of external effects. With i-i externalities become internal.
a) For example, ifto eliminate negativeexternal effects, the government will introduce a restraining tax in the amount of marginal external costs, then the internal costs of the producer will increase and bring the volume of output in line with the socially optimal.
b) To internalize positiveexternalities, the state uses incentive subsidies.
- Coase theorem
If resource ownership rights are clearly defined and respected, including the possibility of free exchange of these rights, then the market will be able to resolve the problem of externalities on its own, without the participation of the state, by buying and selling these rights.
public goodsare the indivisible benefits of collective use.
Properties of public goods:
- non-excludability from consumption (the very nature of a pure public good is such that it is impossible to separate payers from non-payers);
- non-rivalry in consumption (an increase in the number of consumers does not reduce the utility of this good for others, therefore, the marginal cost of providing = 0).
Those public goods and services that fully meet these properties are calledpure public goods.
The free rider problem- free use of a good for which one should pay. The market is not designed to solve the problem of bezb-a, tk. does not have such mechanisms that are able to separate the payer from the non-payer.
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Market failures or market fiasco – English Market Failure, is a situation that arises when the resources available in the market are allocated inefficiently. This situation in the economy can take many forms and appear in many situations, and it is often perceived as something that needs to be corrected through government intervention. For example, when the fishing industry experiences a market fiasco, the government is expected to make a number of policy decisions to address the problem.
When market failures occur, it means that the system is not Pareto efficient ( English Pareto Efficient). In turn, Pareto efficiency refers to a situation in which any improvement in one area would cause a corresponding loss in another area. For example, if a furniture manufacturer lowers the price of his products, which benefits consumers, he will lose part of the profit, that is, he will receive a loss equal to the benefit to consumers. On the other hand, a furniture manufacturer may reduce the purchase prices of raw materials to reduce costs and compensate for damage, however, this will lead to damage to raw material suppliers. That is, when a system achieves Pareto efficiency, it means that it works at an optimal level, maintaining the balance of all its elements.
There are many factors that can contribute to market failures. One of the most common causes is monopolies, as there is no competition for certain goods or services in such a market. External influences can also be a problem that contributes to market failure, since the final cost of goods and services may not take into account the impact of such external factors like wages or environmental impact. Some public goods are also seen as a form of market failure.
Social inequality in society can also lead to a market failure, as well as many other factors. In all cases, market failures are characterized by the fact that there is a better and better effective method resource allocation, but it is not being used. Public goods are often used as an example of a market failure. For example, people might argue that private firefighting firms could be more efficient than similar firms. public services financed from the state budget.
The state can provide various interventions to solve the problem of market failure, for example, by changing legislation, monetary policy, minimum wages and taxation. One problem with government intervention is that it can exacerbate market failures by failing to allocate and allocate resources efficiently. Deciding when and how to intervene is a difficult decision that can be complicated by political and social issues affecting the people and institutions involved in decision making.
Market failures are such manifestations of the action of market mechanisms that induce market participants to make economic decisions that are not optimal or undesirable for society, i.e. when market mechanisms direct the activities of firms or independent entrepreneurs in a direction that is subjectively beneficial for them, but not optimal for the whole society.
Important!!! Such decisions are not the result of errors of market participants or extraneous reasons, but the result of the actions of the market itself.
Typically, the following market failures are distinguished:
1. Tendency towards the establishment of monopolistic control over the markets by individual economic entities. A competitive environment can lead to the formation of oligopolies or monopolies. The market system does not have internal mechanisms that counteract the monopolization of the market. Hence the need for antitrust law and regulation.
2. uneven distribution of information in the economic environment. The seller has much more information about his product than the buyer. This phenomenon is called information asymmetry. Costs for obtaining information are not available to all market participants. These costs are one of the main types of transaction costs. Recognition of the cost of transmitting and receiving information is one of the main differences between modern economic theory from neoclassical doctrines. The amount of profit depends not only on resource ...
The principle of exclusivity does not apply to public goods; the consumption of a good by one member of society does not diminish the ability of others to enjoy that good.
The market itself is not able to ... because it is very difficult to measure the utility received by each member of society in the consumption of a public good. Accordingly, it is impossible to determine how much everyone should pay for the use of a public good. Failure to respect socially acceptable boundaries of inequality in income distribution…. The market is neutral and we distribute benefits.
New income..result
The market system is characterized by a tendency, the concentration of wealth at one pole ... does not contradict the principles of the market, if it occurs
5. A special place is occupied by the inability of the market ... Externalities are additional benefits or costs that arise as by-effect from the activities of others .. Externalities are not the result of the activities of those
(something missed)
Lack of motivation for efficient and rational business management in the government or production structure
Main economic functions states:
1. Production of public goods.
2. Regulation of the activities of natural monopolies is a sphere of economic activity where the unit costs of production are steadily decreasing with an increase in the volume of supply of goods and services, i.e. the more goods produced, the lower the cost of producing a unit of output and, accordingly, the price.
In the US, the government controls the prices of these products.
The most common prices.
Tax equalization of income.
Maintaining macroeconomic stability is the activity of the state aimed at eliminating inflation, unemployment, and the economic crisis.
Business cycle - rise, peak, fall, crisis, trampling
Intensive and extensive economic growth. An extensive type of economic growth involves an increase in the volume of production resources used on the basis of already existing technology. Almost all states went through an extensive type of economic growth, in particular, during the period of industrialization, when the foundations of the modern economy were being created.
An intensive type of economic growth involves an increase in the volume of output, it involves an increase in production by improving the use of existing resources of existing resources. We can say that the extensive type emphasizes quantitative factors, and the intensive type emphasizes qualitative factors.
Improving technology involves increasing labor productivity, resource and energy saving. Strictly speaking, in practice there is no purely extensive or purely intensive type of economic growth. AT real life there is a close interaction of various factors, in particular, it would be more correct to speak of a predominantly extensive and predominantly intensive type of economic growth.
In the Soviet Union, for most of its history, it was predominantly extensive that dominated. During the period of industrialization, a huge amount of resources and labor force was involved in the trade turnover at the expense of economic resources, at the expense of various resources and rural residents.
As you know, the Soviet Union had a huge amount of natural resources and, until a certain time (approximately until the beginning of the 70s), large labor resources. However, since this period, the problem of labor shortage has become more and more acute.
In the developed countries of the West, more (starting from the second half of the 20th century) begins the transition to a predominantly intensive type of economic growth. This was expressed in the creation of new industries, such as electronics, and the transition to ever more advanced technologies. Modernization and reconstruction of production took place on a massive scale, as a result of which, with practically the same volumes of production resources, primarily due to labor productivity, there was a sharp increase in output.
Much has been said in the Soviet Union about the need for a similar transition from the extensive to the intensive type. But in practice, we continued to develop along an extensive path. As a result, the backlog of the Soviet economy (in terms of quality indicators) from the Western one (labor productivity, material consumption, energy intensity of manufactured products) begins to increase.
The conducted studies in the leading developed countries show a steady trend of increasing these factors in providing economic facts. Thus in modern Russia the task of large-scale modernization, among others, is designed to solve the problem of transition to a qualitatively new type of economic growth.
Economic integration.
Economic integration implies close interaction and interweaving of national economies, resulting in a single reproduction process, i.e. the national economies participating in it create a single multinational economic complex.
To date, the most striking example of regional economic integration is the European Union, which includes 27 countries (the eurozone operates within its framework, which includes 17 countries). The signing of the Treaty of Rome in 1957 in Rome is considered the official beginning of the creation of the European Union. It was signed by France, Italy and the Benelux countries (Belgium, the Netherlands, Luxembourg). Each of these 6 countries have been closely connected with each other for a long time, complementing each other.
Reasons for the collapse of the market economy. The planned economic system is characterized primarily by the monopoly role of the state in all economic issues. The state is the owner of all economic resources. Distributes them, determines the range and volume of products. Sets prices and wages for all production participants. All economic entities in a planned economy are strictly subject to instructions from the center. Such a system, like everything else, has its pros and cons. The "+" planned economy includes:
1. The ability to concentrate the necessary resources in the shortest possible time for the implementation of major projects. Example: The task arose to create nuclear weapons - money is allocated and then everything is solved, and so on with all the most difficult tasks.
2. The ability to solve the most complex social problems (the creation of free healthcare, the absence of unemployment)
Disadvantages of a planned economy:
1. Absence effective system motivation for most participants in the economic process. (equal distribution)
2. Lack of competition
3. Inefficient use of available resources
The main achievements of the planned economy in the Soviet Union:
1. Created one of the most powerful economic systems in the world, not inferior to the United States
2. Major social issues have been resolved
3. Outstanding results have been achieved in the development of fundamental science and space exploration.
As the planned economy developed and reached a new level, negative trends began to appear in the 1970s. In particular, the transition from intensive to intensive course of development. As a result, the Soviet economy in the 1970s began to enter a period of stagnation. The country's leadership emphasized the need for a transition to a new quality of economic growth, however, in practice this is not observed. In the 70s Soviet Union begins to experience a shortage of labor to continue extensive growth, since its main source ( rural population) was nearly exhausted. In addition, in the 70s, the Soviet Union faced unfavorable trends in the world oil market (Oil jumped in price by 4 times, we received income, and the United States put pressure on Saudi Arabia). In the 1980s, the Soviet economy experienced negative impact the following factors:
1. Sending troops to Afghanistan, which required huge budgetary expenditures
2. Elimination of the consequences of the Chernobol accident
3. Gorbachev's ill-conceived anti-alcohol campaign, which led to a massive reduction in budget revenues
4. Deployment of the SOI program ( star Wars) and the need for Reagan's response to it.
Under these conditions, the question more and more often arises in Soviet society: Why our country, which has achieved universally recognized outstanding success in fundamental science in creating an education and healthcare system, cannot provide the same high standard of living for its citizens, which has already been achieved in Western European countries. And gradually society comes to the conclusion that it is necessary to change the economic system
Market failures include externalities. At the same time, the market is not able to adequately transmit information about the price. Pricing policy must reflect the objective cost of production of goods and services. The manufacturer and the customer are involved in the process of buying and selling. If their actions begin to influence third parties who are not involved in the process of trafficking, then we are talking about such types of market failure as externalities. For example, pollution environment.
4. Public goods as a manifestation of market failures. properties of a pure public good. "Quasi-public" goods and their types.
1. Public goods - goods that have the following features:
A sign of non-exclusion - it is almost impossible to exclude a person from the circle of consumers of this good
A sign of non-rivalry in consumption - the consumption of a good by one person does not reduce the possibility of consuming it by another
A sign of indivisibility - the good cannot be decomposed into separate units
This definition is well illustrated by the following examples:
The lighthouse that guides sailors at night shines on all who reach its light.
The ensured internal and external security of the state is available to everyone who is on its territory.
Public goods are not at all like private goods, it is almost impossible to organize their sale: individuals enjoy the effects of public goods, but avoid paying for them (free rider effect).
There are not so many pure public goods; mixed goods are more common, including properties from both private and public goods. These are club, transshipment goods and common resources, such as clean water and fish in the sea.
Market failure is the inability of the market to allocate scarce resources efficiently.
Out of many possible causes market failure three deserve special attention: externalities, public goods and lack of competition.
Why does the state produce such a large number goods, the supply of which would be more efficiently organized by private firms? Some answers, mostly related to political imperialism and the dysfunctional nature of politics, were offered in Chapter 9. But there are less solid reasons, like the belief that the state should provide public goods. Recently, economists have subjected this argument to scathing criticism. However, entrepreneurs don't wait for scientists to show them the way; while scientists debated whether markets could work, markets produced what consumers needed, from lighthouses and schools to postal services and flood insurance. The “market failure” claim is perhaps the most important intellectual argument for state intervention in the market system. Some economists argue that, under certain circumstances, markets are unable to provide what we want and what we would be willing to pay for. However, if a person does not declare a market failure in the pages of a scientific economic journal, he usually means that the market could not provide something he needed. Economists argue that people will "cheat" when providing non-exclusive goods; that is, some shipowners will not make contributions to the maintenance of the lighthouse, since they can use its services while others make contributions. Of course, if a lot of people are trying to "ride without a ticket", it is possible that this service will not be provided at all. Therefore, some economists believe that the state, in order to correct market failures, must levy taxes and provide such services itself.
Quasi-public goods are useful goods, the consumption of which forms healthy lifestyle life and socially favorable habits. Their consumption is considered desirable. Health care, free secondary education, free vaccinations for animals, national defense, etc. can be considered as such benefits.
Quasi-public goods are easily amenable to market pricing (cost + profit = PRICE), but because of their positive effect on the population, the state deliberately assumes the cost of their production. In essence, the state endows private goods with the properties of public goods.
5. Demand for pure public goods and its features. Free rider problem
A pure public good is a good that is consumed collectively by all people, whether they pay for it or not. It is impossible to derive utility from the provision of a pure public good by a single consumer.
The demand curve for a pure public good is obtained by adding up its individual marginal utilities to all consumers at each possible price, which implies vertical summing of individual demand curves.
The free rider effect is an economic phenomenon in which the consumer of a public good tries to avoid paying for it.
The free rider problem arises when an individual is consciously unwilling to pay for a public good, expecting to receive a benefit without any payment. One of the clearest examples of the manifestation of the free rider problem is the phenomenon of citizens evading taxes that go (among other things) to provide public goods.
The problem with the free rider is that free riders underestimate the value of a purely public good, resulting in a lower output of the public good than its effective output. Thus, the possibility of free consumption of purely public goods causes the inefficiency of their production.
Ultimately, there may be a situation where no one will pay and the provision of a purely public good will be impossible. In other words, everyone is interested in consuming a purely public good, but no one wants to pay. In this regard, the task of producing purely public goods is reduced to solving the question of how to ensure their production in the presence of free riders.
The solution of the free rider problem by the method of elimination is either associated with significant costs or leads to underproduction of a purely public good, and, consequently, to a decrease in total utility. In this case, the provision of purely public goods becomes possible only with the participation of the state.
The forms of state participation in the provision of purely public goods are different: from the direct production of goods (national defense, fire protection) to the financing of public goods produced by the private sector (cleaning and garbage disposal, some types of medical care). However, their essence is the same: the production of public goods, provided through the state, is financed by taxes levied on all citizens, as a method of solving the free rider problem.
The provision of public goods with the participation of the state does not automatically mean the achievement of an effective volume of their production. The propensity of low-income individuals to limit the financing of the production of public goods through tax cuts reduces the supply of public goods to below efficient levels. The use of a differentiated tax rate helps to reduce efficiency losses in the production of public goods, but runs into the problem of determining consumer preferences, without which it is impossible to reasonably differentiate the tax.
The main reasons for the failure of the market, external and internal features
The market is a system that functions effectively when the task of ensuring the organization of trade on mutually beneficial terms is fully realized. An ideal market must make any exchange real if it is beneficial for both parties. When the market fails to fulfill its function, the concept of market failure arises, with limited resources being allocated inappropriately. As a rule, market failures include insufficient competition, and scientists also include externalities and public goods in this category.
Current Market Failure Theory and Externalities
Experts say that external effects can be attributed to market failures. At the same time, the market is not able to adequately transmit information about the price. Pricing policy must reflect the objective cost of production of goods and services. The manufacturer and the customer are involved in the process of buying and selling. If their actions begin to influence third parties who are not involved in the trading process, then we are talking about such types of market failure as externalities. For example, environmental pollution.
What Are the Consequences of Market Failure: Public Goods and the Market Fiasco
Goods and services have two main characteristics. First, it is a property of the exception. That is, the manufacturer offers his product to some people, but not to others. The second property is rivalry. If a unit is used by one person, then another cannot use it. Such features are usually considered in terms of the presence or absence of competition. If a product does not have the properties of exclusion and rivalry, then it is called a public good. These include, for example, the work of the police, the space program, the care of the streets of settlements and much more. It is known that the types of market failures include public goods.
Lack of competition and major types of market failures in the economy
Market failures also include lack of competition. Market prices should reflect the opportunity cost. If harmful external effects begin to emerge, prices fall below alternatives. When competition is not strong enough, prices begin to rise unnecessarily, which can lead to a market fiasco. Among the reasons for the market failure, this is probably one of the main ones. A similar scheme is typical for monopoly markets, when the consumer begins to receive a false price signal. Further may 
economically unreasonable substitutions follow. Such situations greatly undermine the market for goods and services, introduce instability.
What other market failures can you name?
Also, market failures include inflation, the emergence of unemployment. In these cases, the actions of sellers and buyers become uncoordinated. It should be noted that market failures do not include equal distribution of income, regulation of pricing, adoption of antimonopoly legislation. The state can resolve the situation of market fiasco. For this, laws are passed that prescribe the use of equipment that controls the level of environmental pollution. Taxes may also be introduced that reflect damage from harmful externalities of production. The property rights of the owners are specified in order to protect nature from pollution. Of course, market failures are a very important economic problem that requires the search for new solutions.