Market Failures, Taxes, and Subsidies: Crash Course Economics #21

Name: Market Failures, Taxes, and Subsidies: Crash Course Economics #21
Uploaded: 2016-01-22T20:29:25.000Z
Duration: 24 min 12 s

Introduction

In this video, the hosts discuss market failures and how economists address them. They explain that while competitive markets do a good job of allocating resources, they are not perfect and sometimes fail.

Market Failures

Sometimes people have a personal incentive to do something that is against the collective interests of the group. This is known as a free rider problem.

Public goods are things that are for our collective well-being, like fire protection, schools, and national defense. When markets alone fail to provide enough of these things, it's called market failure.

The Tragedy of the Commons explains why common goods that everyone has access to are often misused and exploited. It causes most environmental problems like air pollution, deforestation, killing endangered species, and overfishing.

Externalities occur when there's an external cost or benefit that accrues to other people or society as a whole.

Government Intervention

Governments often fund public goods because private firms won't produce them even if they're essential due to non-exclusion and non-rivalry characteristics.

Taxes are used by governments to demand money from citizens for essential services like fire protection since people shouldn't be allowed to opt-out.

Environmental economics is an entire subfield of economics focused on addressing and solving environmental issues caused by unregulated markets.

Public Goods

The hosts discuss public goods in more detail.

Characteristics of Public Goods

Non-exclusion means you can't exclude people who don’t pay. For example, it's impossible to limit the benefits of national defense only to those who pay their taxes.

Non-rivalry means one person’s consumption doesn’t ruin it for others. Public parks are an excellent example since they can be shared.

Market Failure

If a good or service meets these two criteria, it's unlikely that private firms will produce it, no matter how essential it is.

Street lights and organizations that track and prevent the spread of diseases are pretty important, and if the government doesn’t step in, we probably won’t get them.

Tragedy of the Commons

The hosts explain the Tragedy of the Commons in more detail.

Exploitation of Common Goods

The Tragedy of the Commons explains why fish stocks get depleted, rainforests get cut down, and endangered species get hunted for their hides or horns.

Unregulated markets sometimes don't produce the outcome that society wants because they don't have the right price signals.

Allowing fish to reproduce and generate more resources for future generations is not done because fishermen have an incentive to exploit as much as they can as quickly as possible.

Externalities

The hosts discuss externalities in more detail.

Negative Externalities

Externalities occur when there's an external cost or benefit that accrues to other people or society as a whole.

Negative externalities occur when other people are made worse off. For example, air pollution from factories affects everyone's health.

Positive Externalities

Positive externalities occur when other people are made better off. For example, education benefits not only individuals but also society as a whole by creating a more educated workforce.

Externalities and Market Failure

This section explains the concept of externalities and how they can lead to market failure. It also discusses the role of government in addressing externalities.

External Costs and Benefits

External costs are associated with polluting waterways, causing dead fish, contaminated drinking water, and people getting sick.

Positive externalities exist too, such as education leading to more income generation and productive members of society.

Both negative and positive externalities require government intervention to solve the problem.

Government Intervention

The government can use regulatory policies or market-based policies to address externalities.

Regulatory policies involve rules established by government decree while market-based policies manipulate markets, prices, and incentives to correct for market failures.

Governments often use both policies in real life situations.

Regulatory Policies

This section focuses on regulatory policies as a solution for addressing negative externalities.

The Role of Government Regulation

Government regulation is necessary because it sets rules that protect citizens from harm caused by negative externalities.

The amount of regulation needed depends on the situation. Even those who oppose regulation agree that certain things like nuclear weapons should not be sold at Target stores.

Market-Based Policies

This section discusses market-based policies as a solution for addressing negative externalities.

Taxes and Subsidies

Market-based policies manipulate markets, prices, and incentives to correct for market failures. Taxes and subsidies are examples of market-based policies.

Taxes on the production of TVs or chemicals can decrease production and limit pollution while federal grants that help subsidize college education will increase the amount of education people buy.

Advantages of Market-Based Policies

Market-based policies have an advantage over regulatory policies because they earn tax revenue that can be used for other purposes instead of spending money on enforcing regulations.

Emissions Trading

This section discusses emissions trading as a market-based policy to address negative externalities.

Pollution Permits

Emissions trading involves the government issuing pollution permits. If a factory doesn't hold one, it must reduce its emissions or purchase permits from another factory that has reduced its emissions below its permitted level.

Cap and Trade Program to Reduce Acid Rain Pollution

The success of the cap and trade program in reducing acid rain pollution in the US is discussed, along with its quantified human health benefits.

Cap and Trade Program Success

A cap and trade program was successfully implemented in the US to reduce acid rain pollution.

The program cut sulfur dioxide emissions.

According to a 2003 report from the Office of Management and Budget, “the Acid Rain Program accounted for the largest quantified human health benefits of any major federal regulatory program implemented in the last 10 years, with benefits exceeding costs by more than 40:1.”

Decreasing Pollution to Prevent Climate Change

The proposition of decreasing pollution by either 5% or 30% is presented as a solution to climate change. However, it highlights why addressing climate change is difficult due to individual countries' inability to prevent other countries from polluting.

Proposition for Decreasing Pollution

What if the world’s largest economies were given a similar proposition: “Select whether you want to decrease your pollution by 5% or 30%, with a small catch; if more than 50% of counties choose only 5% then climate change will make Earth unlivable."

This simplifies the issue but illustrates why it's so hard to address climate change.

Tragedy of Commons

Individual countries might work to reduce carbon dioxide emissions, but they can’t prevent other countries from polluting. It’s the Tragedy of the Commons.

In an unregulated global economy where producers want to make products as cheaply as possible, there's an incentive to ignore international environment to get ahead.

Global Issues

Global issues like climate change, human rights abuses, and nuclear proliferation can't be effectively addressed if countries don’t work together.

But that requires a lot of trust and a lot of commitment.

Free Markets vs. Government Intervention

The role of government intervention in markets is discussed, with the conclusion that it's not about choosing between free markets or government but rather how they can work together to make our lives better.

Role of Government Intervention

There are many cases when the government should get involved, and there are even some situations when the government should just take control.

The question isn’t “which is better: free markets or government?”

The question is “how can they work together to make our lives better?”

Conclusion

Markets aren't perfect.

Thanks for watching.