Progressive Boink

[blacktoothgrin]

what are the chances of that happening webber.

[webber Cooledge]

Could you define "when markets fail"?

I have established that governments should help with necessities, such as food and clean water. However, even these are limited to "making sure that the people responsible for keeping them in order are all right", not "handing them out".

when markets cannot allocate goods and services efficiently; producers "aren't producing enough" or are "producing too much" output. i was just going to link to an intro on the subject, but i can't find any that aren't just words words words and are easy to understand. so basically, there are generally accepted to be three scenarios in which a market can fail:

1. when an agent has too much power. in perfect competition where there are lots of different buyers and sellers, a seller cannot raise their price too much because they will lose business, and buyers are similarly restricted. however, if someone has a lot of market power, like in a monopoly or oligopoly, a seller can restrict their supply in order to raise prices, because who else is the buyer going to get their goods from? this gives the seller a better deal (let's say their gain is 2), but buyers lose out more (their loss might be 5), so on the whole, the market is not distributing as much utility (happiness) as it was before (3 less than in a perfect market). society is worse off. the same deal goes for large buyers with a lot of power.

2. when the good or service has externalities. externalities are things that affect neither the buyer or the seller of the commodity, and are not taken into account in the price. an example of a negative externality might be a car factory polluting a river. the dudes buying and selling cars don't care about the pollution, so they value the car on its own merits. but other dudes who want to go fishing but can't because all the fish are dead are shit out of luck. there is a clear outside cost to society in this case, which is not being taken into account in the price. therefore the car factory is producing more than the social optimum number of cars. positive externalities work the opposite way: if left alone, the market produces less than the socially optimum quantity of goods. an example of a positive externality might be advancing technology: if a producer invests a lot into r&d and comes up with a new product, other producers could benefit from this, without spending anything on r&d. here is a model of a market with a positive externality. society would be better off if the market were producing qs, but it is only producing qp.

3. when there is something about the nature of the good or how buyers and sellers interact which makes it prone to market failure. this is far more complicated so i won't really go into it but it is basically what happens when any of the assumptions of a perfectly competitive market that i haven't already discussed do not hold. this could include public goods (goods that you can't exclude people from enjoying, like maybe a pretty landscaped park or a statue of mel gibson as william wallace), informational asymmetry problems (there is a large gap in knowledge between buyers and sellers, like if you were to buy a used car, the dude on the lot knows a lot more than you about which cars are good and which cars are duds), high transaction costs (the costs of doing business, basically, which means that it is hard to be flexible, an essential element of efficient markets), and agency problems (the dude working for you is working in their own interest, and not yours, for example a real estate agent).


anyway the standard economic view is that because governments are concerned with making society better off, and that when markets fail there is an opportunity for what is called a pareto improvement (you could make someone better off without making anyone else worse off [in my example about the monopoly, you could intervene so that buyers improved their situation by 5, then simply take 2 of that and give it to the seller, so the seller is as well off, and the buyers are better off]), so market failure is a clear case for government intervention.

whew!

[James]

That is a pretty good question, so you'll forgive me if I take a little bit of time to think about it.

(also i should probably do my work because i am just so busy and regardless i still come here)

[emily]

You're right. You should. We're done here.

[Justin]

unlockin this to say that james gay.