Nov 17 2014

A video and audio introduction to Market Failure

Published by at 7:00 am under Environment,Externalities,Market failure

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”

Story #3: “E-waste”

Story #4: Sweatshops and story #8: Toxic chemicals (watch up to 11 minutes)

Discussion Questions:

  1. 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.
  2. 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.
  3. 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.
  4. 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?
  5. What makes each of the stories above examples of market failure?

About the author:  Jason Welker teaches International Baccalaureate and Advanced Placement Economics at Zurich International School in Switzerland. In addition to publishing various online resources for economics students and teachers, Jason developed the online version of the Economics course for the IB and is has authored two Economics textbooks: Pearson Baccalaureate’s Economics for the IB Diploma and REA’s AP Macroeconomics Crash Course. Jason is a native of the Pacific Northwest of the United States, and is a passionate adventurer, who considers himself a skier / mountain biker who teaches Economics in his free time. He and his wife keep a ski chalet in the mountains of Northern Idaho, which now that they live in the Swiss Alps gets far too little use. Read more posts by this author

17 responses so far

17 Responses to “A video and audio introduction to Market Failure”

  1. Giulioon 26 Nov 2011 at 11:26 am

    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?
    The story that talks about the lighthouse, because ,as they explained in the discussion they had, if the government wouldn't build the lighthouse the people that need it probably wound't meet and put some money together to build one; they might think they don't need it or think that is not worth it because they won't get any money out of it.

    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?
    I think the story of the computers send to "recycle" in countries like Africa is the right example for this question. Computers are produced because there are people always ready to buy them, but, once a computer is not usable anymore, it is sent to poor places, where every single part is taken in order to get a couple of cents to make it to the next day. But these computer, even though they are useful, can damage the health of the kids that estract the parts out of it just to sell them and get some money.

    Which of the stories above is about merit goods, or one 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.
    The video that talks about sweatshops because as it's said the workers need only a few cents an hour to be able to buy the food that they need to survive for one more day. So the company hire them and keep their salary low because they know that they don't need more than what they ask for.

    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?
    Toxic chemicals is something that government regulates the production of, in fact in the video it is said that some governments restricted the import and/or export of these chemicals. Talking about what government does NOT regulate the production of is the waste produced by the countries in the whole world, as the audio about the trash island says. The island made of trash is huge and the things that can be found come from different places like US, China and so on.

    What makes each of the stories above examples of market failure?
    The story of the little island named Nauru. In the story it is said that a mineral was found in the little island in the middle of the pacific ocean so, due to the fact that the people living there understood they could get rich, they let europeans countries dig into their land to extract the mineral, and, even if they were getting richer, they were destroying their land; in fact at the end of the story the people living in Nauru get tricked by who was taking care of the money, so with a destroyed island and no money they could only feel ashamed.

  2. Simon Hon 26 Nov 2011 at 12:02 pm

    1. 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.
    The podcast concerning lighthouses and autopsies is about public goods. Lighthouses and autopsies are both goods/services which people will benefit from, but would not be provided by the free market because they little to no chance of direct benefit for the producer of the good.

    2. 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.
    Story 1, 2,3 and 6

    3. 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.
    Story 4

    4. 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?
    Lighthouses and autopsies are goods which the government regulates the production of, due to their lack of allocation by the free market. Goods that the government does not regulate the production of include:

    5. What makes each of the stories above examples of market failure?
    In each story there is an allocation of goods by the free market that is inefficient.

  3. Chrison 26 Nov 2011 at 12:47 pm

    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.
    As explained in 4 mp3 tape, Lighthouse is a good example of a public good. A good in wich everyone who needs it would benefit from it but the government wont build it, since it has no profit. If any sailor decides to in face build one, by himself, he will not receive any profit to pay it off.

    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.
    A good example of some goods of being over-allocated are the old computers that consumers in developed countries no longer use. When thinking being environmentally friendly by recycling it at any random store, it most likely or all the time ends up in developing countries. Where, young kids rip apart the computer to find the wire, place the amount of wire on a tire, and set it on fire. The smoke produced by burning the covering around the wire, causes very unhealthy fumes for the childrens to be breathing. In addition, for each computer they wreck it produces more dust which contains lead for example. The external cost in this case, is the health of these children being damaged and the old computers are being over-alloacted towards developing countries instead of actually being recycled.

    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.
    In countries surrounded by poverty, they need any kind of job that pay suffieciently enough for a meal a day. So they will accept any low payment and that is excactly what companies like Nike are looking for. They want to make their prodcuts cheap and sell it at a higher price. That is one of the producer's goals.So the merit good, is being able to provide jobs for people in poverty, but once the people are no longer desperate. Nike will watch out for a new city or country with a lof of poverty. The merit good, is providing jobs for the people but only for a certain time and then move on to benefit the soceity 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?
    The production of hormoned-milk, was being regulated by the government. They were over-alloacting their resource towards the production of milk, that the govnerment had to actually pay farmers not to produce milk. The supply of this milk was great, but not enough demand to remove all of it from the shelves of stores.

    What makes each of the stories above examples of market failure?

  4. Annaleaon 28 Nov 2011 at 6:47 pm

    1.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.

    The story concerning the lighthouses and autopsies is about public goods. Both of these goods are goods which people benefit from when available, but would simply not be provided by the free market because there is barely any personal benefit to building or offering these services. People would be using the service but not directly paying for them.

    2. 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.

    Stories 1, 2, and 3 are about demerit goods, which are goods that would be over-provided by the free market . Story 1- jeans in China are being overproduced because of the cheapness to produce them, however the chemicals in the dye have very negative effects on the environment due to water pollution etc. In story 2, computers are being overproduced because there is a large demand for them, but once it is no longer usable, it is sent to developing countries to be taken apart and sold for a little bit of money. They take the wires from the computer and put it all together onto a tire, and set it on fire. The smoke produced by burning the covering of the wire causes very unhealthy fumes for the children to be inhaling. The health of children is being damaged and compromised simply because resources for computers are over-allocated.
    Story 3, trash island- an over-allocation of trash because of increased consumption.

    3. 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.

    Story 4-

    4. 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?
    The government regulates the production of lighthouses and autopsies as the free market will not take control of the production of these goods. The government does not regulate the production of is waste produced by countries, as seen in the trash land story, as there is a huge amount of waste created and gathered in the middle of the ocean from all different countries, and it simply continues to pile up as there is no control over it.

    5. What makes each of the stories above examples of market failure?

    In each story, there exists an allocation of goods by the free market that results in inefficiency (either under or over allocation).

  5. Matson 28 Nov 2011 at 8:45 pm

    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.
    The story about the autopsies and lighthouses talks about public goods, because lighthouses and autopsies are both goods that society needs. But if for example a sailor decides to build a lighthouse, there is no profit since he can't control who is using the lighthouse in order to charge them. Everybody using it would be free riders. That's why government builds all the lighthouses because otherwise coastlines are unsafe and accidents are likely to happen.
    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.
    Due to the toxic chemicals, inorganic cotton t-shirts for example are over-provided since we use more than we need. Same thing is happening with plastic and E-waste, because they harm the environment and the human health and are not recycled.
    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.
    story 4 is about a merit good, which originally has been phosphate in Nauru.
    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?
    Government regulates the production of lighthouses and autopsies mentioned in story 5. This is because the free market doesn't provide these goods.
    What makes each of the stories above examples of market failure?
    In each story, there is either an over allocation or an under allocation of resources which results in the market being inefficient.

  6. Megon 28 Nov 2011 at 8:50 pm

    1. 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.
    The story about lighthouses and autopsies shows two examples of public goods. Both lighthouses and autopsies would not be provided by the free market, because there is little or no profit incentive to offering these services. If one person builds a lighthouse, there is not way to control how many people use it — so people can use it without paying (the freerider problem). The government must provide these services or they will not be provided at all.

    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.
    The E-waste, Nauru, Sweatshops, Toxic chemicals, trash
    Stories 1,2, 3, and 4 are about demerit goods, goods that are causing negative effects on the environment due to their high consumption. In story one, jeans are being overproduced because the cause large amounts of pollution where they are made in China. In story two, computers and electronic goods are being produced cheaply in large quantities. However, they create problems when they are shipped to developing countries to be recycled, creating health hazards and environmental problems there. A large amount of trash is being created, forming a 'trash island' in story three that is due to the over allocation of resources to consumer goods that require packaging, or in many cases the disposable goods themselves. Story four is another example of environmental damage. On the island of Nauru, the rich phosphate deposits were exploited (this resources was misallocated) at the cost of environmental damage.

    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?
    None of the stories are about merit goods.

    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?
    The government currently regulates the production of lighthouses and autopsies. The government also regulates cheap labor (sweatshops) with a minimum wage, but only to a certain extent. The government doesn't regulate the production of trash or toxic chemicals.

    What makes each of the stories above examples of market failure?
    In each story there is a loss of allocative efficiency (resources are not being efficiently allocated).

  7. Julianon 28 Nov 2011 at 9:47 pm

    1.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.

    Story 5 is about lighthouses and autopsies which are two great examples of public goods. Because it is not possible to make any real monetary profit from these two products, if left entirely up to the free market, not many individuals would actually bother building/performing them although they benefit society greatly. Lighthouses prevent boats from entering and colliding with the rocky areas of bays accounting for far safer marine transportation while autopsies provide society with useful medical information concerning the major causes of death.

    2.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.

    Stories 1,2, and 3 are all about demerit goods, or goods that would be over-allocated by the free market.

    Story 1 is about jeans in China and the attempt of various governments to reduce the production of jeans in order to reduce the negative effects the dye has on the environment and citizens of places like “cowboy city”

    Story 2 looks at the demerit good computers. Due to the high demand for computers there is realistically high supply for them as well. Once these computers become outdated or dysfunctional however, the “old” computer are sent to developing nations where the citizens’ health can be in danger when taking apart the over allocated CPUs.

    Story 3 called “Trash Island”, is another good example of a demerit good; trash. Because goods such as plastic bags cost close to nothing to produce, the free market over provides this good in many places in the world. While some governments/retailers/organizations have attempted to do something about the over-productions of trash (coop incentive to increase the price of plastic bags compared to paper bags), Trash Island is proof that more action needs to be taken to reduce the amount of products such as plastic bags available on the market.

    3.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.

    According to story 6 which is about sweatshops, sweatshops and their low income labor can be considered a merit good as the low wages which workers in the developing world receive don’t only benefit them (as they are able to afford ends meet) however they also benefit the Western consumers because these enjoy cheaper prices of their preferred products. However I am not sure I totally agree that one can call all sweatshops a “good” good because of the inhumane conditions that exist in many.

    4.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?

    As stated in question 2, trash (e.g. plastic bags) is a good example of goods which the government is clearly not regulating the production of (at least not successfully) as places like Trash Island would cease to exist if they did

    An example of a good which the government does regulate the production of is lighthouses. Because lighthouses are public goods, there is little to no incentive for individuals to produce them, yet they are plentiful all over the world showing that the government has regulated their production.

    5.What makes each of the stories above examples of market failure?

    In all stories certain products are either over or under-allocated resulting in inefficiency in the market for the respective good.

  8. Emma S.on 28 Nov 2011 at 11:10 pm

    Discussion Questions:

    1. 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.
    The story that talks about lighthouses and autopsies is the one that is about public goods; lighthouses are a good example of a public good that if left entirely to the free market would barely be provided – people do not invest in these because they bring no profit to them as there is no way of charging every single person who uses the lighthouse. However, if lighthouses are not subsidized by the government, people will eventually come together and build at least the bare minimum needed, since without them they might run into rocks or cliffs and sink their ships; there will not be enough lighthouses to offer the safety needed, but there will be some lighthouses built regardless.

    2. 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.
    Stories 1, 2, and 3 are all about demerit goods: the first story talks about the production of blue-jeans in China – these are considered a demerit good as they are overproduced due to the low production costs and following low prices, and the dye that is used to give the jeans their color is toxic and harmful. Because it is so expensive for the companies to clean their waste water of the dye before once again releasing it into the river, they dump the polluted water straight into the rivers without treating it, leading to external costs on the people living around the factories.
    Story 2 talks about the overproduction of computers due to the high demand; after the computers are no longer usable they are sent to developing countries where they take the computers apart and burn the materials to get certain parts; the fumes that are created during this process are very toxic and consequently very harmful for the people who are extracting the materials as well as the environment around them.
    Story 3: the trash island is created because of over-production of packaging materials that are thrown away after a single use.

    3. 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.
    Story 4.

    4. 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?

    The stories in which goods are being regulated are the story about the lighthouses and autopsies, and an example of a story in which goods are not being regulated is in the story about the trash islands: since there is no real government in the middle of the ocean, there is no one to take care of the trash.

    5. What makes each of the stories above examples of market failure?
    In each of these stories the resources for the production of the goods are being either under or over-allocated (mis-allocated), and is therefore not efficient.

  9. Andrew Fischeron 29 Nov 2011 at 9:12 am

    1. The report about autopsies and lighthouses deals with public goods.  Autopsies and lighthouses would both likely not be provided if left to the free market.  While there are great benefits to each, scientific advancement in the case of autopsies and better navigation with lighthouses, the market is unlikely to provide either because the opportunity to turn a profit on either is very small.
     
    2. Both the “Cowboy City” story about jeans factories in China and the “Trash Island” report deal with demerit goods.  In the case of the jeans factory, the pants are probably over-provided by the market and purchased by consumers because of the very low price, which does not accurately reflect the cost of producing them. That cost is passed to the people residing near the factories by the manufacturers in the form of environmental and health costs. In the "Trash Island" example, the same goes for packaging materials, which make up a large percentage of the "islands". The packaging is over-provided by the market because of its low price which does not accurately reflect the cost of producing it (environmental cost).
     
    3. The “Cowboy City” story deals with both merit and demerit goods.  The merit good in the story is the clothes “factory” in Paris, France which uses environmentally friendly dies to manufacture its clothes.  These dies do not produce the negative effect on society that the cheaper chemically-based dies used by the jeans manufacturers in China do. However, because their prices are higher than those offered by their competitors using chemical dies, not very many are demanded and therefore supplied.
     
    4. Government currently regulates the production of lighthouses and autopsies which, as public goods, it encourages the consumption of. Government does not, however currently regulate the production (and disposal) of plastic bags. "Trash Island" is a result and the problem could likely be solved through government intervention.
     
    5. In each story, resources are either over or under allocated towards the production of the good(s) in question.

  10. Ronaleeon 22 Jan 2012 at 9:44 pm

    That’s a smart answer to a dfcifiult question.

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