00:01
The functions of government and the economy include enforcing laws and contracts to maintain law and order, such as property laws and traffic laws, etc.
00:15
Maintaining competition, which is essential to a free market, redistributing income, and providing an economic safety net.
00:25
So this would include government welfare programs such as disability benefits and unemployment benefits.
00:35
Taxation is also involved in redistributing income because taxes will redistribute income from the rich and give back more to the poor.
00:46
So that way income is redistributed more evenly.
00:51
Provide public goods.
00:57
So these public goods would include things like public education.
01:00
And public libraries.
01:04
Direct market failures.
01:09
And we'll talk about how they would do this later.
01:13
These would basically be failures in the free market economy.
01:16
Stabilize the economy.
01:19
So they do this through fighting unemployment and recession, encouraging price stability and promoting economic growth.
01:28
So essentially, they want to promote macroeconomic stability.
01:35
There are several types of market failure.
01:37
These are all factors that would affect the functioning of free markets.
01:54
First of all, let's talk about a monopoly.
01:56
This occurs when a firm dominates the market and can set higher prices.
02:04
This leads to loss of allocative efficiency and productive inefficiency.
02:14
Allocative efficiency occurs when revenue received is just enough to ensure all the resources used in making of a product are sufficiently awarded to encourage.
02:24
Continued supply.
02:25
In the case of monopoly, consumer will be forced to pay more because of market domination by the monopoly.
02:34
Monopoly has less incentive to cut costs and reduce prices because it doesn't face competition from other firms.
02:46
So that goes against the free market, which encourages competitions between firms in order to generate a fair market price.
03:00
The monopolist will seek to extract a price from consumers above the cost of resources used in making the product.
03:07
This results in super normal profit because the consumers do not have a choice except to purchase from the monopoly because there's lack of competition.
03:20
Also, there's lack of incentives for the monopoly to work at product innovation and developing better products.
03:28
Higher prices also mean that consumers ' needs and wants are not being satisfied as the product is being underconsumed.
03:44
Higher prices cost a loss of consumer surplus and welfare.
03:49
This disproportionately affects lower income families.
04:01
So basically, monopolies will have an average effect on lower income families.
04:13
Also, if a monopoly gets too big, it leads to dis -economies of scale.
04:20
It means it has higher average costs because it gets too big or difficult to coordinate.
04:25
That causes higher prices still.
04:27
And this also causes higher prices to suppliers because monopoly may use its market power to pay lower prices to its suppliers.
04:43
For example, farmers will have little alternative but to supply to supermarkets who have dominant buying power or the monopolies.
05:00
So the main points are allocative inefficiency, unequal distribution of income, higher prices, and lack of incentives and choice.
05:15
Let's talk about a public good.
05:22
So a public good is goods which are non -rival and non -excutable, such as police or national defense.
05:33
When a good is consumed, it doesn't reduce the amount available for others.
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That makes it a non -rivalry good.
05:42
So if a police is called to your home, this is not going to reduce the number of police that can be called to other people's houses.
05:50
However, if you consume one apple, it reduces the amount of apples available for.
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For others.
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Non -excludeability.
05:58
It's not possible to provide a good without it being possible for others to enjoy or use.
06:04
So everyone can use the police.
06:06
If you call the police for help, then that doesn't mean that somebody else cannot also call the police for help as well.
06:14
It's non -excutable.
06:16
A public good is often unprovided, under -provided, and free markets.
06:22
That's because when we have a public good with non -rivalry and non -excutability, there's an incentive not to pay.
06:29
So we have something called the free rider phenomenon.
06:32
So people essentially get a free ride with these goods.
06:38
Firms may not provide the good as they have difficult to charge in people.
06:43
And it doesn't fit our free market economy.
06:48
So that is a market failure in the sense of the free market economy...