Market Failure

InS 10: Introduction to Market Failure

See this doc It has a simple intro

In groups, discuss:

  • What do you know about pricing?
  • How do companies calculate the cost of a good?
  • Why are similar goods sometimes priced differently?
  • Why are goods different prices in different places?

Once again:

  • What is supply and demand?
  • Give a concrete example

What is missing in the supply and demand equation?

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Market failure is when pricing mechanism leads to an inefficient allocation of (scarce) resources and loss of economic welfare

Today, we will only consider 2 types of market failure: positive and negative externalities

Externalities are the consequence of an industrial or commercial activity which affects other parties without this being reflected in market prices

  • What is not included in the price of:
    • Cigarettes?
    • Cars?
    • Tree planting?
    • Education?

How can we adjust prices, now that we know their externalities?

 

Externalities do not have to be about pricing. Any activity that has an unintended impact on a third party can be seen as an externality.

PPT

Exercise 1: In your table groups

  1. Define and give one example of:
  • Private cost
  • Social cost
  • Social benefit

2. Explain 2 positive and 2 negative externalities  in the school. (Social benefit and social cost)

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Exercise 2:  In groups of 2

Read one of the following articles, describe it to the class while explaining:

Exercise 3: As a class, we will play Externalities mystery!

You will be divided into 8 groups of 2 or 3

  • Each group will briefly explain wether the hospital should be built or not, base don their card’s perspective.
  • We will then have small discussions on wether or not the hospital construction should go ahead.
    • What were the reasons for your decision?
    • Why were those reasons more significant than any other reason?
    • What other factors might it depend on?
    • What else might you want to know before making a final choice?

Then:

  • Which costs are private costs/benefits, and which are external?
  • Can we put a value on any of these externalities?
  • Who is likely to benefit/suffer the most as a result of the hospital project?

If time:

How is Christmas an externality?

Or spot all the externalities in Dr Seuss’ the Lorax

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