- The abuse of MARKET POWER, which can occur whenever a single buyer or seller has significant influence over PRICES or OUTPUT.
- EXTERNALITIES - when the market does not take into account the impact of an economic activity on outsiders. For example, the market may ignore the costs imposed on outsiders by a firm polluting the environment
In this video it talks about the six different types of market failure which were:
- Externalities- Where third parties are ignored leading to companies under producing causing output to be reduced
- Missing Markets- When certain goods are not produced due to consumers waiting on some one else to buy and sell associated with the Free rider project
- Asymmetric Knowledge- When someone with superior knowledge takes advantage of a buyer to seller to gain greater revenue or value
- Lack of Competition in the market- Occurs in a monopoly or oligopoly market in order to gain greater revenue associated with Cartels and Collusion
- Unstable prices- Occurs with accommodates like agriculture and fossile fuels where prices for products highly fluctuate
- Labour Markets- When unemployment increases to a high rate, where the equilibrium rate is not reached
Cartels and Collusion- A cartel is when there is any agreement between businesses or to reduce competition or not to compete with each other to increase joint ventures. A collusion is very similar to a cartel but the fundamental difference is that collusion is only applied to individuals or just two businesses and there market interaction with setting prices, which does not have to entail a formal agreement.
Video on Collusion in vitamin market
Further examples of Cartels are Chiquita and Pacific Fruit groups, who supplied bananas. They operated a price fixing cartel in Southern Europe which deprived European consumers of the benefits of undistorted competition for nearly a year. Pacific Fruit were fined €8,919,000.
ACC, Danfoss, Embraco, Panasonic and Tecumesh were fined a total of €161,198,000 for operating a cartel in the supply of household and commercial refrigeration compessors, used in Fridges, vending machines and ice-cream coolers
Further example of a Collusion was a lawsuit which has been filed US alleging that Apple, HarperCollins, Hachette Book Group, Macmillan, Penguin and Simon & Schuster colluded to illegally fix the prices of ebooks. It is claimed that they conspired to increase ebooks prices in order to boost profits and force ebook rival amazon to abandon its pro-consumer discount price
The Competition Commission & and the EU Commission-
The Competition Commission (CC) is an independent public corporation which helps to ensure healthy competition between companies in the UK for the ultimate benefit of consumers and the economy. It conducts in-depth investigations into mergers and markets and also has certain functions with regard to the major regulated industries.
An example of where the Competition Commission intervened with a company was with Tesco in 2009 stated in this article from the Guardian
The Competition Commission intervention into Tesco in 2009
In it it states how the Competition Commission begun a competition test to ensure that Tesco couldn't continue buying new stores if it owned 60% of all sales within a 10 minute drive, in order to prevent consumers losing value.
Another example is where the Competition Commission inquired into the bus market in 2010 in order to try and deal with the lack of competition between different bus companies where on company would be dominant in one area causing prices to rise for consumers by up to 9%.
Competition Commission's bus inquiry
The European Commission is the EU's executive body and represents the interests of Europe as a whole (as opposed to the interests of individual countries).
The term 'Commission' refers to both the college of commissioners and the institution itself – which has its headquarters in Brussels, Belgium with offices in Luxembourg. The Commission also has offices known as 'representations' in all EU member countries. The Commission's main roles are to set objectives and priorities for action, propose legislation to Parliament and Council, manage and implement EU policies and the budget, enforce European Law (jointly with the Court of Justice)
represent the EU outside Europe (negotiating trade agreements between the EU and other countries, etc.).
An example of where the EU Commission has intervened has been with European railways where the commission has tried to liberalise the service believing that this will help to promote competition which will help boost economic growth within the Eurozone.
Plans to liberalise Europe’s rail services run into opposition against the EU commissions proposal
President Barroso paid tribute to Cyprus for its Presidency and ow the EU Commission aims to help restore prosperity within the Eurozone in 2013
Fair Trade- Fair trade is an organized social movement that aims to help producers in developing countries to make better trading conditions and promote sustainability. It focuses on most notably handicrafts, coffee, cocoa, sugar, tea, bananas, honey, cotton, wine, fresh fruit, chocolate, flowers, and gold.
Fair trade cotton
Shows the simple action that can be taken to support free trade and what benefits fair trade
This article from the Guardian presents the drawbacks of Fair trade, in the view that shopping on its own cannot undo the wrong when a whole system is at fault, but it can send a powerful message to politicians that consumers demand reform.
Positive and Negative Externalities-
The simplest version of externalities the private calculation of benefits or costs differs from society's valuation of benefits or costs
Are economic side effects with costs or benefits effecting third parties outside of the market, arising from production and consumption of goods and services for which no appropriate compensation is paid.
It arising from economic activity which is not reflected fully in PRICES.
They are also known as spill-over effects.
They are a form of MARKET FAILURE, since the amount of the activity carried out if left to the free market, there will be an inefficient use of resources.
If the externality is beneficial, the market will provide too little; if it is a cost, the market will supply too much.
To deal with an externality that is negative, a tax can be put on the activity as a solution or, if the externality is positive, a SUBSIDY can be imposed on the activity.
The most efficient solution to deal with externalities is to require them to be included in the costings of those engaged in the economic activity, so there is self-regulation.
Social costs include things like pollution and congestion that are suffered by society in general, not by any one producer. Are generally greater than private costs.
Environmental costs of externalities include pollution which damages associated with it are borne by society as a whole and are not reflected in market transactions.
The video below explains the way economists, businesses and economics in general views the damages it causes to the environmental and how it is disconnected to the rest of the world
The simplest version of externalities the private calculation of benefits or costs differs from society's valuation of benefits or costs
Are economic side effects with costs or benefits effecting third parties outside of the market, arising from production and consumption of goods and services for which no appropriate compensation is paid.
It arising from economic activity which is not reflected fully in PRICES.
They are also known as spill-over effects.
They are a form of MARKET FAILURE, since the amount of the activity carried out if left to the free market, there will be an inefficient use of resources.
If the externality is beneficial, the market will provide too little; if it is a cost, the market will supply too much.
To deal with an externality that is negative, a tax can be put on the activity as a solution or, if the externality is positive, a SUBSIDY can be imposed on the activity.
The most efficient solution to deal with externalities is to require them to be included in the costings of those engaged in the economic activity, so there is self-regulation.
Social costs include things like pollution and congestion that are suffered by society in general, not by any one producer. Are generally greater than private costs.
Environmental costs of externalities include pollution which damages associated with it are borne by society as a whole and are not reflected in market transactions.
The video below explains the way economists, businesses and economics in general views the damages it causes to the environmental and how it is disconnected to the rest of the world
This video talks about the part that politics and government play in their role of controlling externalities
Businessman dumped 100 tonnes of an iron-containing chemical into the Pacific Ocean as an experiment in geoengineering which caused environmental Externalities
An example on the economic costs which BP have witnessed after the huge environmental externality that they caused with their oil spill in the Gulf of Mexico in 2010
BP: Cleaning up the legal spill
Example is based around Starbucks and other giants avoiding taxation which has social externality costs, due to it reducing the level of income that the government have to spend on society.
starbucks tax troubles are signs for things to come multinationals wake up and smell signs of change
Businessman dumped 100 tonnes of an iron-containing chemical into the Pacific Ocean as an experiment in geoengineering which caused environmental Externalities
An example on the economic costs which BP have witnessed after the huge environmental externality that they caused with their oil spill in the Gulf of Mexico in 2010
BP: Cleaning up the legal spill
Example is based around Starbucks and other giants avoiding taxation which has social externality costs, due to it reducing the level of income that the government have to spend on society.
starbucks tax troubles are signs for things to come multinationals wake up and smell signs of change
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