As a follow up to my recent post, A Video and Audio Introduction to Market Failure, I plan to introduce the diagrams we use to illustrate and analyze negative and positive externalities and the inefficiency arising in the markets for certain goods. My fellow Econ Video Lecturer, Mr. Clifford, provides a great introduction to these diagrams in his video, EconMovies 7: Anchorman. We’ll watch the video below before beginning our notes on the subject today! Enjoy!
The table below shows the trade balances for the nations from which my year two IB Economics student come. They are ranked in order from the country whose trade deficit makes up the largest percentage of its GDP to the country whose trade surplus makes up the largest percentage of its GDP. The blue bars represent the value of the deficit or surplus of each nation. As can be seen, Zimbabwe’s trade deficit is very small in dollar terms, but since its economy is also very small this deficit makes up a large percentage of its total GDP. Click on the image to visit an interactive version of the chart on which you can study the data more closely. Then answer the questions that follow.
- Identify and define the four components of a nation’s current account balance.
- According to the data, which three countries are the most import dependent? Which three countries are the most export dependent? Which country has the most balance trade in goods and services? Which has the most imbalanced trade?
- For one of deficit countries above, answer the following two questions:
- Assuming its currencies’ exchange rates is floating, explain how persistent current account deficits will affect a country’s exchange rate over time?
- Summarize and explain the likely effects of a current account deficit on the following: a) the financial account balance, b) domestic interest rates, and c) national debt.
- For one of the surplus countries above, answer the following two questions:
- Assuming its currencies’ exchange rates is floating, explain how persistent current account surpluses will affect a country’s exchange rate over time?
- Summarize and explain the likely effects of a current account surplus on the following: a) domestic savings rates, b) the financial account balance.
- What are the various methods a country can take to reduce a current account deficit? What is the benefit of having a balanced current account as opposed to a large deficit or surplus?
Each of the following videos or audio clips illustrate an example of a market failure. Watch or listen to each and answer the questions that follow:
Stories #1 and #2: “Cowboy City” and “Toxic Cotton”
Stories #3 and #4: “Trash Island” and “Nauru is Dead”
Story #4: “E-waste”
Story #5 “Why is there no Ebola vaccine?”
Story #7: Sweatshops and story #8: Toxic chemicals (watch up to 11 minutes)
- Which of the stories above is about public goods, or goods which would not be provided at all if left entirely to the free market? Explain.
- Which of the stories above is about demerit goods, or ones which would be over-provided by the free market due to their negative effects on the environment or human health? Explain.
- Which of the stories above is about merit goods, or ones which are provided by the free market, but at a quantity below which is socially optimal due to the fact that they create spillover benefits for society as a whole.
- Which of the stories describes a good or goods which the government currently regulates the production of? Which goods does government currently NOT regulate the production of?
- What makes each of the stories above examples of market failure?
Over the years I have written many posts on this blog about market failure. The purpose of this activity is for students to re-visit some of these posts, reflect on different types of market failure, and then complete a short survey in which they demonstrate their understanding of the topic.
With the results from the survey, we will have assembled a comprehensive spreadsheet of all the different types of market failure we study, including definitions, examples, graphical representations and possible government responses. This document can then be used for review by Economics students studying for a market failure test.
First, you must get into five groups and each group must read a couple of blog posts about their assigned market failure type.
Group 1: Public Goods:
Group 2: Positive consumption externalities:
Group 3: Positive production externalities:
Group 4: Common Access Resources and the Tragedy of the Commons
Group 5: Information Asymmetry
Once your group has read and discussed the blog posts you were assigned, work together to complete the following form. Only click submit once all questions have been answered!
Google Form – Market Failure Definitions and Examples
Once each group has submitted the form, the results can be viewed publicly here:
Market Failure Definitions and Examples Study Guide
In the last couple of months the exchange rate of the US dollar against the currencies of many of its trading partners has been rising steadily. The charts below show the value of the dollar in terms of Japanese Yen and Euro in the last month.
The reasons for the rise in the dollar are simple and illustrate some of the determinants of exchange rates that we learn about in our IB Economics classes. Listen to a recent story from APM’s Marketplace radio show about the dollar’s recent rise, then answer the questions that follow.
- Discuss with your class how each of the factors mentioned in the podcast help explain the recent rise in the value of the US dollar against other major currencies:
- Why might the rising dollar…
- help developing countries?
- help American consumers?
- hurt American producers?
- Using your knowledge of macroeconomics, discuss and explain the following claim: “the impact of more expensive exports and cheaper imports may be to stifle inflation just enough to make the Fed slow down any rate increases, which would in turn slow down the dollar’s rise.”
- Using diagrams for the market for US dollar in Europe and for the Euro in the United States, and referring to one of the determinants of exchange rates mentioned in the story, illustrate the rise in the dollar’s value against the Euro over the last month and the corresponding fall in the Euro’s value against the dollar. Use values from the chart above on to determine the appropriate exchange rate values for your graphs.
- Explain how each of the following interventions could be used to devalue the dollar, assuming the US government or Federal Reserve Bank decided the dollar’s appreciation posed a threat to the US recovery: