MARKET FAILURE

• Zig Ziglar: 'You don't have to be great to start, but you have to start to be great.'
• At the end of this lesson, students should be able to:

  1. explain the concept of economic efficiency

  2. distinguish between social costs and private cost and social benefits and private benefits.

  3. distinguish among private goods, public goods and merit goods.

  4. explain the concepts of market failure;

  5. outline the causes of market failure.
• Economic Efficiency consists of Productive and Allocative Efficiency
• Productive and Allocative Efficiency

  When resources are being efficiently used and allocated towards the production of goods and services which generate the highest level of economic well-being
• Pareto Efficiency

  When resources are allocated in such a way that no one loses, a Pareto improvement is achieved. When such improvement comes to an end, this leads to Pareto optimality/Pareto efficiency where it would only be possible to make someone better off by making someone else worse off.
• Answer the question in the graph

  
• Asymmetric Information

  The situation in which one party to a transaction has more information than the other and benefits from it
• Adverse Selection

  One party to the transaction has more information than another, e.g. a car dealer knows more about the car he is selling. Tendency for persons with high risks to insure and low risk persons not to insure. Adverse selection occurs when asymmetric information is exploited.
• Causes of Market Failure

  • Merit Goods
  • Asymmetric Information
  • Externalities
  • Public Goods
  • Occupational and Geographical Immobility

  
• Zig Ziglar: '"You don't have to be great to start, but you have to start to be great."'
• At the end of this lesson, students should be able to:

  1. explain the concept of economic efficiency

  2. distinguish between social costs and private cost and social benefits and private benefits.

  3. distinguish among private goods, public goods and merit goods.

  4. explain the concepts of market failure;

  5. outline the causes of market failure.

  
• Economic Efficiency consists of Productive and Allocative Efficiency
• Productive and Allocative Efficiency

  When resources are being efficiently used and allocated towards the production of goods and services which generate the highest level of economic well-being
• Pareto Efficiency

  When resources are allocated in such a way that no one loses, a Pareto improvement is achieved. When such improvement comes to an end, this leads to Pareto optimality/Pareto efficiency where it would only be possible to make someone better off by making someone else worse off.
• Define the term externalities (2 marks)
• Positive Externalities of Consumption

  Explanation of positive externalities of education graph
• How Negative Externalities Leads to Market Failure

  Explanation of negative externalities of production

  
• Asymmetric Information


  The situation in which one party to a transaction has more information than the other and benefits from it
• Adverse Selection


  One party to the transaction has more information than another, e.g. a car dealer knows more about the car he is selling. Tendency for persons with high risks to insure and low risk persons not to insure. Adverse selection occurs when asymmetric information is exploited.
• Causes of Market Failure

  • Merit Goods
  • Asymmetric Information
  • Externalities
  • Public Goods
  • Occupational and Geographical Immobility

  
• Causes of Market Failure

  Explanation of occupational and geographical immobility

  
• Zig Ziglar: '"You don't have to be great to start, but you have to start to be great."'
• At the end of this lesson, students should be able to:

  1. explain the concept of economic efficiency

  2. distinguish between social costs and private cost and social benefits and private benefits.

  3. distinguish among private goods, public goods and merit goods.

  4. explain the concepts of market failure;

  5. outline the causes of market failure.

  
• Economic Efficiency consists of:

  Productive and Allocative Efficiency
• Productive and Allocative Efficiency


  When productive and allocative efficiency are simultaneously achieved, it means that resources are being efficiently used and allocated towards the production of goods and services which generate the highest level of economic well being.
• Pareto Efficiency


  When resources are allocated in such a way that no one loses, a pareto improvement is achieved. When such improvement comes to an end, this leads to pareto optimality/Pareto efficiency where it would only be possible to make someone better off by making someone else worse off.
• Define the term market failure (2 marks)

  Define the term public goods (2marks)

  Explain why public goods are usually provided by government (3 marks)

  Define the term externalities (2 marks)

  
• Positive Externalities of Consumption

  Explanation of positive externalities of education graph
• How Negative Externalities Leads to Market Failure

  Explanation of negative externalities of production

  
• Asymmetric Information


  The situation in which one party to a transaction has more information than the other and benefits from it.
• Adverse Selection


  One party to the transaction has more information than another, e.g. a car dealer knows more about the car he is selling. Tendency for persons with high risks to insure and low risk persons not to insure. Adverse selection occurs when asymmetric information is exploited.
• Causes of Market Failure

  • Merit Goods
  • Causes of Market Failure
  • Causes of Market Failure Cont'd

  
• Occupational and Geographical Immobility

  People may not be occupational mobile because they are not multi-skilled, lack technological know how and educational ability. This results in workers becoming redundant and an increase in structural unemployment. Geographical immobility is the inability to move quickly and easily to another location for work. This may cause regional unemployment.