Writing 2000 words
Sam k5
Q2file4-MPA640Spring2021MarketsBad.pptHOW MARKETS
ACTUALLY WORK
- Five Crucial Market Failures:
- 1) Information failures
- 2) Negative externalities
- 3) Short time horizons
- 4) Under-provision of public goods
- 5) Concentration of economic power
1) Information Failures
Markets allocate resources efficiently if consumers have perfect information about products. However, firms have incentives to distort information.
- Example: False advertising & product safety – The Case of the Ford Pinto
The Case of the Ford Pinto (late 1960s)
The problem: because of faulty placement of gas tanks, tendency for cars to explode in some rear-end collisions
Cost of change: roughly $11/car
Ford’s calculation: even considering the costs of settling law suits for approximately 180 deaths/year due to exploding Pintos, it was more profitable not to make the change.
Ford’s strategy: a) Hide information and deny there was a problem; b) delay things in court and try to overwhelm plaintiffs in court cases; c) use their economic and political power to first block legislation and then block effective implementation of stricter safety regulations;
Results: the legislation to require higher safety standards was delayed from 1961 to 1966 and effective implementation of regulations delayed until 1977. Hundreds of lives lost as a result.
False Advertising
Labeling
Product safety
Example: Auto Safety
----Ford Pinto in 1970s
----road stability of SUVs in 1990s
----ignition switch failures in 2000s
Ford Pinto
-Ford did the math: the safety improvement would cost $11 per car and save roughly 180 lives per year. The retrofit would cost about 137 million. How much was a life worth? Ford calculated this figure on the basis of likely court costs for passenger deaths at the time and came up with an estimated $200,000 per death. After doing the math, Ford decided it was not worth making the safety change. Moreover, by fighting the court cases, insisting that these fiery deaths were due to driver error, and resisting legislative regulation-Ford could further minimize the costs of the safety problem by delaying remedies.
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- 2) Negative Externalities
- Market efficiency depends on prices reflecting the true costs of producing things. However, firms often displace costs on others.
Example – Environmental Pollution. It is cheaper for a factory to discharge pollutants into a river or the air than to dispose of them in a responsible way.
Example – A Company Relocating Overseas.
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- 3) Short Time Horizons
“Time horizons” refer to the length of time into the future that people take into consideration when making decisions in the present.
Economic competition leads firms to have relatively short time-horizons. This imposes costs on future generations for our present production and consumption.
- Example - Climate change
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- 4) Under-Provision of Public Goods
A public goods is something that benefits everyone.
Examples of public goods:
National defense
Public sanitation, public health, public broadcasting, clean air, education……
Profit-maximizing firms in competitive markets will fail to produce adequate public goods.
Examples
Suppose that education was provided only by the market. Private firms offered educational services and parents would buy these services for their children’s education. There would be no subsidies and no public provision. In such a world, a large proportion of poor people would fail to get even minimal education. Or consider public health and sanitation. Suppose that sewers, water treatment, and human waste disposal were provided only by the market; there was no public provision of these services. This would be a disadvantage even to those who could afford those services, because poor sanitation would be a breeding ground for diseases that would affect everyone. Markets are good at producing things for which most of the benefits are captured y those who directly pay for the good or service, but not public goods whose value is diffused to a side variety of people. Markets will underproduce public goods, and this is inefficient.
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- 5) Concentrations of Economic Power
The free-market argument assumes that no firm has power to impose their will on others. However, our economy is dominated by giant corporations.
Power – the ability to get your way.
- Amazon, Microsoft, Wal-Mart, Exxon Mobil, Boeing, General Motors…………
- Can stifle innovation, control markets, etc
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MARKETS & COMMUNITY
- Community
A group in which people are concerned with the well-being of other people and feel solidarity and obligation toward others.
- Capitalist markets can be corrosive to a sense of community for two main reasons:
1) Markets reward self-interested, individualistic behavior.
2) Markets foster high levels of economic inequality.
REMEMBER TO FIRST STATE THE LOGIC OF NEOCLASSICAL ECONOMICS
Examples
Suppose that education was provided only by the market. Private firms offered educational services and parents would buy these services for their children’s education. There would be no subsidies and no public provision. In such a world, a large proportion of poor people would fail to get even minimal education. Or consider public health and sanitation. Suppose that sewers, water treatment, and human waste disposal were provided only by the market; there was no public provision of these services. This would be a disadvantage even to those who could afford those services, because poor sanitation would be a breeding ground for diseases that would affect everyone. Markets are good at producing things for which most of the benefits are captured y those who directly pay for the good or service, but not public goods whose value is diffused to a side variety of people. Markets will underproduce public goods, and this is inefficient.
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