Recap of why markets in theory should allocate resources efficiently (competition holding down prices and costs, raising quality, consumer sovereignty/choice, invisible hand, allocative efficiency). 27 Understanding Define market failure and have an Situation in which the free market does not allocate resources optimally in market failure understanding of efficiency, that is, spite of the advantages highlighted. the maximisation of consumer/ – producer surplus at the free market Public goods: Non-excludable and non-diminishable. Free rider problem equilibrium output. means that they would not be supplied in a free market leading to a welfare 28 loss. Touch on cost-benefit analysis and the difficulty of putting economic Understand that market failure may values on concepts such as human life. take many forms, including public goods Monopoly power: Covered under market structures. and demerit goods externalities Externalities: Cost or benefits to third parties arising from production or consumption that are not taken into account by the free market, meaning monopoly that equilibrium output will be either too high or too low thus a information asymmetries and – misallocation of resources due to the divergence between social cost and gaps private cost. SC= PC + EC. an absence of private property rights Production externalities: (pollution from production and so on). Social cost income inequality is greater than private cost, therefore such goods will be under-priced and volatile prices over-supplied in the free market. Analysis using MSC/MSB diagrams. Appreciate the reasons for, Consumption externalities: and Demerit goods. Case studies on and the consequences of, each health, education, tobacco, alcohol and cars/roads, using social source of market failure for cost/benefit analysis and MSC/MSB diagrams where appropriate; these economic agents. require some time on them for learners to really understand the welfare loss, but can be linked back to allocative efficiency diagrams from earlier in Learners should be able to the course. distinguish between public goods and private goods.
Recap of why markets in theory should allocate resources efficiently (competition holding down prices and costs, raising quality, consumer sovereignty/choice, invisible hand, allocative efficiency). 27 – 28 Understanding market failure Define market failure and have an understanding of efficiency, that is, the maximisation of consumer/ producer surplus at the free market equilibrium output. Understand that market failure may take many forms, including public goods and demerit goods externalities monopoly information asymmetries and gaps an absence of private property rights income inequality volatile prices Appreciate the reasons for, and the consequences of, each source of market failure for economic agents. Learners should be able to distinguish between public goods and private goods. Situation in which the free market does not allocate resources optimally in spite of the advantages highlighted. Public goods: Non-excludable and non-diminishable. Free rider problem means that they would not be supplied in a free market leading to a welfare loss. Touch on cost-benefit analysis and the difficulty of putting economic values on concepts such as human life. Monopoly power: Covered under market structures. Externalities: Cost or benefits to third parties arising from production or consumption that are not taken into account by the free market, meaning that equilibrium output will be either too high or too low – thus a misallocation of resources due to the divergence between social cost and private cost. SC= PC + EC. Production externalities: (pollution from production and so on). Social cost is greater than private cost, therefore such goods will be under-priced and over-supplied in the free market. Analysis using MSC/MSB diagrams. Consumption externalities: and Demerit goods. Case studies on health, education, tobacco, alcohol and cars/roads, using social cost/benefit analysis and MSC/MSB diagrams where appropriate; these require some time on them for learners to really understand the welfare loss, but can be linked back to allocative efficiency diagrams from earlier in the course.