3.3. Mitigate Market Failures

1. Put your phone in your bag!

PUT YOUR
PHONE IN
YOUR BAG!
DR. TURAKULOV VALIJON | INTRODUCTION TO ECONOMICS

2.

Week #1: Foundations: Incentives & Trade-offs
Week #2: Margins & Gains from Trade
Week #3: Exchange & Transaction Costs
Week #4: Firms, Profits & Income
Week #5:Value, Wealth & Sources of Progress
Week #6: Market Forces & Unintended Effects
TOPIC OF THE WEEK:
Week #7: Institutions that Support Progress
Week #8: Midterm Exam [20 Oct – 24 Oct]
Week #9: Macro Stability & Policy
Week #10: Trade & Part 3
Week #11: Government’s Basic Roles
Week #12: Political Economy & Rules
Week #13: Government Support Programs
Week #14: Planning & Competition
Week #15: Final Exam [15 Dec – 19 Dec]

3.

DR. TURAKULOV VALIJON | INTRODUCTION TO ECONOMICS

4.

DR. TURAKULOV VALIJON | INTRODUCTION TO ECONOMICS

5. Whom to blame?

WHOM TO BLAME?

6. Mitigate Market Failures

MITIGATE MARKET
FAILURES
ELEMENT 3.3

7. Review

REVIEW
DR. TURAKULOV VALIJON | INTRODUCTION TO ECONOMICS

8. Sources of Monopoly – Natural

SOURCES OF
MONOPOLY –
NATURAL
Economies of scale
lower per-unit cost
Small rivals cannot
compete
Example: electricity
grids
Government often
regulates these

9. Sources of Monopoly – Oligopoly

SOURCES OF
MONOPOLY –
OLIGOPOLY
A few large firms
dominate
They may coordinate
prices
Common after
privatization in some
countries
Less competition means
higher prices

10. Sources of Monopoly – Government-Created

SOURCES OF MONOPOLY
– GOVERNMENTCREATED
Licenses and
permits restrict entry
Tariffs ad quotas
block rivals
Exclusive rights
create monopoly
Regulation can protect
incumbents

11. Mixed Track Record

MIXED TRACK RECORD
Some interventions stop
cartels
Others protect big firms
Red tape hurts startups most
Lobbying can distort
regulation

12. Mitigate Market Failures

MITIGATE MARKET
FAILURES
ELEMENT 3.3

13. Why Markets Sometimes Misfire

14. Learning Goals

LEARNING GOALS
01
02
03
04
Define market
failure
Understand
public goods
Understand
externalities
Explore policy
and private
solutions

15. What is Market Failure

WHAT IS MARKET FAILURE
Outcome not efficient for
society
Causes: public goods,
externalities

16. Public Goods

PUBLIC GOODS

17. Traits

TRAITS
Joint
consumption
Non-
excludable
Free riders
cause
underprovision

18. Examples

EXAMPLES
Defense
Flood control
Mosquito abatement

19. Not All Gov Services Are Public Goods

SCHOOLS, MAIL,
HEALTHCARE ARE
EXCLUDABLE

20. Why Markets Underprovide Public Goods

HIGH SOCIAL
BENEFIT, LOW
PRIVATE INCENTIVE

21. Externalities

22. Definition

DEFINITION
Spillover effects on third parties
Negative: pollution
Positive: vaccines

23. Negative Externality

NEGATIVE EXTERNALITY
Private cost < social cost
Pollution example
Outcome: overproduction

24. Positive Externality

POSITIVE EXTERNALITY
Private benefit < social benefit
Vaccines example
Outcome: underproduction

25. Fixing Externalities

26. Government Tools

GOVERNMENT TOOLS
Taxes on harmful
Subsidies on beneficial

27. Private Solutions

PRIVATE SOLUTIONS
Internalize
benefits
Community
rules
Reputation
pressure

28. Why Rules Are Needed

WHY RULES ARE NEEDED
Polluters ignore social cost
without rules
Sweden’s carbon tax pushed
firms to reduce fossil fuel use
and helped cut national
emissions by more than 25
percent since the 1990s.

29. Market vs Government Failure

30. Comparison

COMPARISON
Gov can fix gaps
Government is not a magic fix – it’s an “alternative
form of economic organization”

31. Whom to blame?

WHOM TO BLAME?

32. Whom to blame?

WHOM TO
BLAME?
DR. TURAKULOV VALIJON | INTRODUCTION TO ECONOMICS
Vehicle emissions
Old cars and low quality fuel.
Household heating
Coal and wood burned in
winter.
Industrial pollution
Outdated factories with weak
filters.
Construction dust
Poor dust control and
uncovered trucks.
Geography and inversions
Basin shape and cold air trap
pollutants.

33. Summary

SUMMARY
Public goods
underprovided
Externalities
misalign
incentives
Fixes align private
and social benefit

34. Any questions?

ANY QUESTIONS?
DR. TURAKULOV VALIJON | INTRODUCTION TO ECONOMICS

35. Thanks

THANKS
DR. TURAKULOV VALIJON | INTRODUCTION TO ECONOMICS