Crash Course Economics: Market Failures

Introduction

• Hosts: Jacob Clifford & Adriene Hill
• Topic: Market failures and how economists address them.

Market Failures Overview

• Competitive markets generally allocate resources well, but sometimes they fail.
• Example: A professor's extra credit game demonstrated personal incentives vs. group interests.

Free Rider Problem

• Occurs when individuals benefit without paying.
• Example: Fire department funding scenario where opting for less payment compromises resources.
• Government typically solves this by mandating taxes for essential services (fire protection, schools, national defense).

Public Goods

• Defined by non-exclusion and non-rivalry:
  • Non-exclusion: Cannot exclude non-payers (e.g., national defense).
  • Non-rivalry: One person's use does not reduce availability to others (e.g., public parks).
• Often provided by the government due to market failure to produce them.

Tragedy of the Commons

• Concept: Common goods are often overused and depleted.
• Examples: Air pollution, deforestation, overfishing.
• Leads to depletion of resources and economic collapse for involved parties.

Externalities

• Negative Externalities: External costs (e.g., pollution from a factory).
  • Lead to overproduction and market failures.
• Positive Externalities: External benefits (e.g., education increasing societal value).
  • Lead to underproduction.

Government Intervention

Regulatory Policies

• Rules established by government to control behaviors (e.g., pollution limits, safety standards).
• Example: EPA regulations to control TV factory pollution.

Market-Based Policies

• Use of taxes and subsidies to influence market outcomes.
  • Example: Taxes on cigarettes to reduce consumption.
  • Use of grants to increase education.

Emissions Trading (Cap and Trade)

• Government issues pollution permits which can be traded.
• Incentives to reduce pollution and sell permits for profit.
• Proven effective in reducing sulfur dioxide emissions in the US.

Global Challenges and Cooperation

• Climate change and other global issues require international cooperation.
• Relies on trust and commitment among countries.

Conclusion

• Markets have limitations which sometimes necessitate government intervention.
• Ideal approach involves collaboration between free markets and government to improve societal welfare.

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