2467f_n Lecture (Mkt Failure Nov 08 Essay)

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  • GCEALevelsNov2008

    (a)Explainwhyimperfectinformationandimmobilityoffactorsofproductionmayleadtomarketfailure.(10)

    b)EvaluatethepoliciescurrentlyusedbytheSingaporegovttocorrectthesecausesofmarketfailure.(15)

  • (a)Explain whyimperfectinformationandimmobilityoffactorsofproductionmayleadtomarketfailure.(10)

  • Intro Definemktfailure

    Mktfailureariseswhenthefreemarketfailstoachieveanefficientallocationofresourcesandwhensocialgoalsarenotmet.

  • imperfectinfomarketfailure

    Imperfect info

    Individuals do not fully know private benefits/costs of consuming certain goods

    Individuals are not aware of external benefits/costs of consuming certain goods

    Personal Well-being Externalities

  • imperfectinfomarketfailure

    Demeritgoods(egcigarettes) Definedemeritgoods:gdsthatgovtperceivesasbadfortheindividualconsumingthem

    Individualsmaynotbefullyawareoftheilleffectsontheirhealthunderestimatetheirprivatecostswhenconsumingcigarettes(ORoverestimateprivatebenefit) Incorrectvaluationofprivatebenefit(MPB/DD)

  • Price

    Qty of cigarettes0

    SS

    Dd (with Perfect info)

    Q Q

    A

    B

    Dd (with Imperfect info)

    Qty of cigarettes consumed with full info on health effects

    With imperfect info, too many cigarettes consumed.

    Free mktover-consumption Mkt failure too many resources allocated to producing demerit gds under free mkt

  • imperfectinfomarketfailure

    Meritgood(healthcaresuchasvaccination,breastcancerscreening)

    Definemeritgoods

    Eg:individualsnotfullyawareoflongtermprivatebenefitsofconsumingvaccinationunderestimatetheirprivatebenefits

  • Price

    Qty of vaccination0

    SS

    DD (with imperfect info)

    Q Q

    B

    A

    DD (with perfect info)

    Qty of vaccinations consumed with full info

    on benefits

    With imperfect info, too few consuming

    vaccination.

    Free market: under-consumption. Mkt failure: Not enough resources allocated to providing merit good

  • Imperfectinfomarketfails

    NegativeExternalities Consumersofdemeritgoods(egsmokers)maynotbeawareofcostsborneby3rdpartiesWillnottakeintoaccountMECDivergencebtwMPCandMSC ConsumeswhereMPB=MPC overconsumptionmktfailure

  • Price

    Qty of cigarettes0

    MSC = MPC + MEC

    MPC

    MPB = MSBQs Qp

  • Imperfectinfomarketfails

    PositiveExternalities Consumersofmeritgoods(egfluvaccination)maynotbeawareofbenefitsreceivedby3rd partiesWillnottakeintoaccountMEBExplainhowthisleadstomktfailure

  • Price

    Qty of flu vaccination0

    MPC = MSC

    MPB

    Qp Qs

    A

    C

    B

    MSB

  • Asymmetricinformation: wherebyonepartyhasbetterinfothantheother

    Eg:Healthcare Patientsrelyheavilyondoctorsadvice Unscrupulousdoctorsmayadvisemoremedicaltestsortreatmentsthannecessary DDforthesetestsortreatmentshigherthansociallyoptimal

    Imperfectinfomarketfails

  • Price

    Qty of medical

    treatment

    0

    SS

    DD (if consumers are fully informed)

    Q Q

    A

    B

    DD (with asymmetric info)

    Qty consumed with asymmetric info

    Qty consumed with consumers having full

    info

    Free market: over-consumption Mkt failure: too many resources allocated to

  • FactorimmobilitymktfailsPresenceofstrongBTE Eg:Afirmgainingcontrolovermajorityofkeyresources

    FOPsimmobile:noteasilymadeavailabletopotentialrivals difficultforpotentialrivalstoenterindustryortocompete Greatermonopolypowerforincumbentfirm Fewersubstitutes:DDbecomesmoreinelastic

    GreaterabilitytoincreasePaboveMC GreaterallocativeinefficiencyDiagram?

  • MC

    Q1

    P1

    AR = DdMR

    Costs/Rev/Price ($)

    O Q

    Left to free mkt, at profit max eqb, firm will produce at Q1.

    At Q1, P1>MC

    Not AE (explain!)

    Not enough resources allocated to producing the gd

  • Factorimmobility

    FOPs may be slow to respond to changes in DD or SS

    Occupational immobility

    Geographical immobility

  • Occupationalimmobility Eg:workersretrenchedfromelectronicsindustryunabletogainreemploymentingrowingindustries

    Mismatchbetweenskillsofferedbytheworkersandskillsrequiredbynewindustries

    (Structural)UnemploymentresultsresourcesnotfullyutilizedMktfailure

    Factorimmobilitymktfails

  • Factorimmobilitymktfails

    Geographicalimmobility Eg:Labourmayfacedifficultyinmovingfromoneplacetoanothertofindwork(egfamilyties,differenceincostofliving)

    Unabletochannellabourresourcestoareaswherethereareshortagesoflabourunemployment

    Note:ThismaynotbeapplicabletoSingapore.Moreapplicableforlargecountrieswithhugeregionaldisparity

  • Factorimmobility(duetoimperfectinfo)mktfails

    Somepeoplemaybeuninformedofwhatjobsareavailable unabletomoveontonewjobs jobsearchunemploymentorfrictionalunemployment

  • Immobility of FOPs economy operates at point A inside the PPCSuggests that resources are not fully utilized to achieve max level of output Indication of spare capacity (Inefficient use of resources!) PE not attained

    Good X

    Good Y

    0

    A

    PE

    Achieving as much o/p as possible from given amt of resources.

    Occurs at any point ON the PPC

  • Inconclusion

    Mktfailure:Inefficient allocationofresources:canbemanifestedasunder/overallocationofscarceresources tocertaingoods

    resourcesnotbeingfullyutilized(wastageofscarceresources)

  • 3b) Evaluate the policies currentlyused by the Singapore Governmentto correct these causes of marketfailure. [15]

    Imperfect Info

    Factor Immobility

  • Inviewoftheoverconsumptionofcigarettescausedby imperfectinformationamongprivateindividuals,theSingaporegovthasimplementedpoliciessuchas:

    Education&Campaigns AntismokingcampaignscarriedoutbyHealthPromotionBoard(HPB)eg.Antismokingadvertisementsthroughvariousformsofmedia,antismokingroadshows,antismokingtelephonehelplines

    imperfectinfomarketfailureDemerit goods (eg. cigarettes)

  • Legislation Health warnings on the damaging effects ofsmoking are to be conspicuously indicatedon cigarette packs.Eg. SMOKING CAUSES HEART DISEASE SMOKING HARMS YOUR FAMILY Gory images

    Misleading labeling on tobacco productssuch as light, mild and ultralight is notpermitted.

  • LegislationCigarettecompaniesarebannedfromsponsoringpubliceventsandartsprograms

    Govtsetsaminimumlegalage(18)topurchaseandsmokecigarettes

    Revokelicensesofretailerswhoselltobaccoproductstobuyersinschooluniform(with1st offence)

  • Explain how measures work? Actionsundertakenattempttosolvetherootcause ofoverconsumptionofcigarettesonthepartofprivateindividualsi.e.Imperfectinfo DDforcigarettes correctsthemarketfailureproblem

  • Price

    Qty of cigarettes0

    SS

    Dd1 (with Perfect info)

    Q1 Q0

    A

    Dd0 (with Imperfect info)

    B

    Qty of cigarettes consumed with full info on health effects

    With imperfect info, too many cigarettes consumed.

    Explain how policy works?

  • EvaluationHowever,thesepoliciesmayalsohavetheirlimitations:Govthastoincuradditionalmonitoringandenforcementcoststoensurecompliancetolegislation education&campaignsarecostlyto

    implement effectsofeducation&campaignsareuncertainandcanonlymaterializeinthelongerterm

  • imperfectinfomarketfailureMerit good (preventive healthcare such as breast cancer screening, vaccination)

    In view of the under-consumption of healthcare services caused by imperfect information, the Singapore govt has implemented policies such as:

    Education & Campaigns:E.g. Promotion of pre-emptive measures such asbreast cancer screening etc through variousforms of media, cancer screening road-shows,mobile screening vans

  • Evaluation: Actionsundertakenattempttosolvetherootcauseofunderconsumptionofhealthcaresvcsonthepartofprivateindividualsie.Imperfectinfo;therebyraisingtheDdforhealthcaresvcs,thussolvingthemarketfailureproblem.

  • Price

    Qty of vaccination0

    SS

    DD0 (with imperfect info)

    Q0 Q1

    BDD1 (with perfect info)

    A

    Qty of vaccinations consumed with full info

    on benefits

    With imperfect info, too few consuming

    vaccination.

    Explain how policy works?

  • Evaluation(limitations) education&campaignsarecostly effects of education & campaignsmaterialize only in the longer term

  • Asymmetricinformation: wherebyonepartyhasbetterinfothantheother

    Eg:Healthcare Patientsrelyheavilyondoctorsadvice UnscrupulousdoctorsmayadvisemoremedicaltestsortreatmentsthannecessaryDDforthesetestsortreatmentshigherthansociallyoptimal

    SOLUTION??

    Imperfectinfomarketfails

  • LegislationMedicalpractitionersarestronglyencouragedtodisplaypricesoftheirservicesclearlysothatpatientsaregivenfullknowledgeofcostsoftheirmedicaltreatment.

  • Factorimmobility(duetoimperfectinfo)mktfails

    Somepeoplemaybeuninformedofwhatjobsareavailable unabletomoveontonewjobsjobsearchunemploymentorfrictionalunemployment

    SOLUTION??

  • Careerfairs Careerguidanceprogramsinschools Settingupofjobagenciessuchas

    Jobstreet.cometc.

    FactorimmobilityMktfails

  • Explainhowmeasureswork?Measuresattemptto

    facilitatetheflowofinformationbetweenpotentialemployers&employees

    reducethetimetakenforthejobsearchprocess reducefrictionalunemployment

    Good X

    Good Y

    0

    A

    B

  • Explainhowmeasureswork? AttemptstohelptheeconomymovefromapointwithinthePPCtoapointonthePPC.

    Good X

    Good Y

    0

    A

    B

  • StructuralUnemployment:SOLUTION?Education&Skillstraining (CETMasterplan) WorkforceSkillsQualifications(WSQ)system:Offerseveralskillstrainingprograms

    SkillsProgramforUpgradingandResilience(SPUR):financialsupportschemetoencouragedecliningbusinessestosendworkersforupskilling

    FundedinpartbytheSkillsDevelopmentFundsetupbytheWorkforceDevelopmentAgency(WDA)

    FactorimmobilityMkt failsOccupational immobility

  • Explain how measures work? Equip the structurally unemployed with therelevant skills that enable them to be employedin the new jobs created Solves problem ofthe skills mismatch

    Effect on PPC?

    Good X

    Good Y

    0

    A

    B

  • Evaluation(limitations) Positiveeffectsofretrainingprogramswillonlymaterializeinthelongterm.

    Besides,effectivenessoftheskillsprogramsalsodependsonthemotivationallevelsoftheworkersinvolved thewillingnessoffirmstoemployolderworkers

    firmswillingnesstoconducttrainingprograms

  • Geographicalimmobility GeographicalimmobilityisnotreallyvalidinSingaporescontext.

    Inanycase,Singaporegovernmenthasinvestedinimprovingthetransportationfacilities,intermsofefficiencyaswellasaccessibility

    FactorimmobilityMktfails

  • PresenceofstrongBTE MonopolypowerthatiscreatedasaresultoffirmsgainingcontroloverkeyFOPsisnotasignificantprobleminSingaporeduetotheexistenceoftheCompetitionCommissionofSingapore(CCS)andtheimplementationoftheCompetitionLaw.

    FactorimmobilityMktfails

  • Conclusion Aseachpolicyhasitspros&cons,govtneedstocarryoutitsCBAbeforedecidingonsetofpoliciestoimplement.

  • Conclusion Perhapsbettertoadoptamultiprongedapproach byusingacombinationofpolicieseg.Useoftaxationtogetherwithlegislation&education/campaignsfordemeritgds

    Govtalsoneedstobeawareofgovtfailure!