Market Fail When Firms have Market Power and Competition is Weak

1. Market Fail When Firms have Market Power and Competition is Weak By: Tommy, Hao,Andrew

2. Market Power • Market Power is one potential source of market failure. In pure markets, strong competition between sellers helps to guarantee that production is efficient, quality is good, and prices are relatively low. • Example: Oligopolies and Monopolies

3. Government Deregulation of Key Markets • Over the past two decades, there has been partial deregulation (that is, removal of unnecessary government restrictions to competition). • Examples: Labour, Capital, Electricity, Water, Milk, and Aviation Markets.

4. Reducing Tariffs on Imports • Tariffs are an indirect tax added onto the price of imports. They are designed to make foreign goods dearer and less attractive, thereby reducing overseas competition for local firms. • Examples: Tax on imports Before: After: $60 $80

5. Government Promotion of Stiffer Price Competition • Generally, competition promotes greater efficiency in resource allocation and higher living standards. • Examples: According to Competition and Consumer Act 2010, it requires that Australian firms compete with one another, so heavy fines of up to $10, 000, 000 are imposed on companies that break the law, and directors who break the law may face jail sentences.

6. Government Promotion of Stiffer Price Competition • In contrast, sometimes the government has sought to reduce the level of competition to pursue other objectives, such as creating fuller employment and promotion greater equality in income distribution.

7. WHERE MARKETS FAIL ASYMMETRICAL INFORMATION

8. Definition: Definition of Asymmetrical Information: A situation in which one party in a transaction has more or superior information compared to another. This often happens in transactions where the seller knows more than the buyer, although the reverse can happen as well. Potentially, this could be a harmful situation because one party can take advantage of the other party's lack of knowledge.

9. How the government combats this Asymmetric Information seller to buyer. Australian legislation ensures that when a product is sold at its true value is represented by the seller to guarantee the buyer’s absolute knowledge of the product, that he/she is planning to invest in. E.g: carsales.com has policies that states that all information on available cars are 100% truthful and no information is left out regarding the quality of the car being sold.

10. How the government combats this Asymmetric Information buyer to seller. Buyers having more knowledge of products is becoming less common due to the fact that social media including internet allows people to have a better evaluation of the product. Actions the government takes towards to combating these issues are minimal due to the fact that intervention in the matter would be very complicated and difficult to govern. However, they do regulate by enforcing laws that shift the supply curve back to the right.

11. Market Failure Externalities Minh – Duy & David

12. Externalities Defined • Represent a market failure and are the costs or benefits that arise from the economic activities of firms and households that are passed onto third parties not involved in the original activities. • Negative externalities: Extra costs borne by a third party that arise as a result of the production or consumption or a good or service. • Positive externalities: Extra benefits borne by a third party that arise as a result of the production or consumption of a good or service.

13. Examples • Negative Externalities in Production: when electricity is produced by burning brown coal emitting CO2 leading to climate change. • Negative Externalities in Consumption: Someone who smokes a cigarette close to others will cause them inhale the smoke. • Positive Externalities in Production: a firm undertakes R&D and create ideas/concepts other firms can use. • Positive Externalities in Consumption: Through education you are able to contribute to society.

14. Government Intervention • Laws and legislationExample: The Carbon Tax – July 1st 2012 • Use of an indirect taxExample: excuse tax on tobacco and alcohol + Carbon Tax • Use of Government cash subsidiesExample: paying cash incentives to convert petrol cars to LPG with lower CO2 emissions. • Education and advertising to inform the publicExample: Anti-drink driving and anti-smoking adverts to educate public of the possible risks and encourage change.

16. Demand & Supply Curve Price. Carbon Emissions. (Quantity) S2 S1 Decrease in supply but the price remains the same . D1

17. Socially desirable goods not produced By boys of economics

18. Definition Public goods and services are provided usually by the government for the benefit of the general community. Examples such as, education, health, energy, housing, transport, and communication. These are all services that are beneficial and are important for everybody to use, even if they are poor and cannot afford to pay. Even though they are more desirable services they are however costly to produce or run. If they were sold at low prices firms would be unable to make profits and would reduce production. Therefore insufficient resources would be allocated to these areas by the private sector and there would underproduction and reduces general level of wellbeing.

19. How does the government overcome this? Using the annual budget to pay for public services The government have documents which sets out its planned financial performance and framework for the next financial year. Revenue spent in the budget is raised by the governments taxes. The governments concept of improvising for the gap in its resources between the goods and services distributed which are unpopular to the public and socially desirable is through expenditure on health, education, and so on. This change is resource allocation is done through the budget.

20. Using the budget to pay for subsidies for consumers and producers. The government provides cash subsidies to producers and consumers in order to make some services free of direct charge. Ex; primary and secondary education is free of charge, the use of most roads, street lighting and public hospitals.

21. Changing government laws and legislation The government may use laws mandating the consumption of some goods and services. Ex: Making helmets compulsory for motorcyclists and even using signs in indication of younger drivers ( L’s and P’s). Therefore, this would lead to a increase in the demand of helmets at a given price. In turn, there is a increase in profitability which attracts extra resources into this area of production.

22. Socially Undesirable Goods Overproduced By Bryan Talagtag and James Hua

23. How it happens • Because Australia has a market capitalistic economy, consumer sovereignty is present. • Some consumers are not always sufficiently mature, fully informed or are discerning. • This causes demand for undesirable goods and services to be overproduced

24. Examples of Undesirable Goods • Tobacco • Alcohol • Gambling • Prostitution • Pornography • Drugs • Contract killings

25. What the government does to prevent it • The government places indirect taxes( such as excise tax) on undesirable goods and services. • This would discourage suppliers to produce more since it would cut their profits. • Consumers are also discouraged as the prices increases for the undesirable goods and services due to the tax

26. Current example • On 1st August 2013, the Australian Government announced that it will introduce staged 12.5 per cent increases in tobacco tax over the next four years. • In addition, there is evidence that people from lower socio-economic groups may be more likely to quit smoking as a result of tax increases.

27. Supply and Demand Curve