MARKET FAILURES: EXTERNALITIES, PUBLIC GOODS, AND COMMON RESOURCES
● Read the two chapters fully. They are self-explanatory. (Very important).
● Make sure you are able to identify which market failure is at work if I give
examples, and what solutions can solve the market failures.
MORE MARKET FAILURES
● ASYMMETRIC INFORMATION
○ https://www.economicshelp.org/blog/glossary/asymmetric-information
/
○ https://www.investopedia.com/ask/answers/042915/how-do-financial-
market-exhibit-asymmetric-information.asp
○ Examples of asymmetric information
○ You don’t know if food in the carinderia is clean (demander knows less
than the supplier). Solution, restaurants and carinderias are inspected
by the FDA (Food and Drug Admin), same argument for medicines, again
have to be approved by FDA
○ But yung kulang: asymmetric information plus the market failure of
BOUNDED RATIONALITY (best example, all the businessmen did not
foresee the eruption of covid pandemic, we are not God), are the market
failures most likely to cause serious economic crises and collapse.
Moral hazards, adverse selection (during periods of high interest rates),
good borrowers become bad borrowers thru no fault of their own (eg
travel agencies, airlines now). 2008-9 global financial crisis was caused
by asymmetric information wherein mortgage lenders (the banks) went
too far in lending – even up to low-income, sold the debt and finance
institutions bundled it into mortgage-back securities. (Watch
nominated for Oscar best picture, The Big Short).
● COORDINATION FAILURES
○ Suppose we have the capabilities to make micro-chips and
sophisticated integrated circuits. But problem is, electricity is
, expensive, the S&T and R&D personnel required are scattered in other
industries, the legal requirements for such industries to have their
property rights (incl intellectual property rights) do not yet exist.
○ The high-end electronic sector will not emerge if markets alone
determine the outcome
○ But if government sees this industry as a priority industry (which it is),
then gives it fiscal incentives (e.g. income tax deductions, while it is
developing), improves the provision and costs of electricity, tell DOJ and
the legal sectors to provide laws and institutions that will protect these
high-end electronic industry, provide space for them in the export
processing zones, then perhaps the industry will rise and thrive.
○ Coordination failures imply the government and other players must do
things and arrange things to make viable industries profit and thrive.
● THE FIRST MOVER PROBLEM
○ Similar to the previous market failure (coordination failure), suppose an
innovator has a new invention or new product that will benefit many
industries (e.g. a device that will reduce electricity usage by 50%).
○ The firm has to be protected from copiers – gaya-gaya – which will steal
his product, sell it cheaper and bring down his business. Without this,
this guy will not invest.
○ So government has to give him a limited patent or franchise for this
product and even give him fiscal (tax) incentives to make him improve
this product and marketable. Otherwise, he will not introduce the
product in the market.
● DEBATE AMONG ECONOMISTS, ESP IN THE PHILIPPINES
○ Coordination failure and first mover arguments, as well as many
positive externality arguments (promote firms that will benefit the
economy as a whole) may lead to what is called industrial policy
wherein the government will pick ‘winners’ and give special privileges to
firms and industries that will have beneficial effects to the economy
● Read the two chapters fully. They are self-explanatory. (Very important).
● Make sure you are able to identify which market failure is at work if I give
examples, and what solutions can solve the market failures.
MORE MARKET FAILURES
● ASYMMETRIC INFORMATION
○ https://www.economicshelp.org/blog/glossary/asymmetric-information
/
○ https://www.investopedia.com/ask/answers/042915/how-do-financial-
market-exhibit-asymmetric-information.asp
○ Examples of asymmetric information
○ You don’t know if food in the carinderia is clean (demander knows less
than the supplier). Solution, restaurants and carinderias are inspected
by the FDA (Food and Drug Admin), same argument for medicines, again
have to be approved by FDA
○ But yung kulang: asymmetric information plus the market failure of
BOUNDED RATIONALITY (best example, all the businessmen did not
foresee the eruption of covid pandemic, we are not God), are the market
failures most likely to cause serious economic crises and collapse.
Moral hazards, adverse selection (during periods of high interest rates),
good borrowers become bad borrowers thru no fault of their own (eg
travel agencies, airlines now). 2008-9 global financial crisis was caused
by asymmetric information wherein mortgage lenders (the banks) went
too far in lending – even up to low-income, sold the debt and finance
institutions bundled it into mortgage-back securities. (Watch
nominated for Oscar best picture, The Big Short).
● COORDINATION FAILURES
○ Suppose we have the capabilities to make micro-chips and
sophisticated integrated circuits. But problem is, electricity is
, expensive, the S&T and R&D personnel required are scattered in other
industries, the legal requirements for such industries to have their
property rights (incl intellectual property rights) do not yet exist.
○ The high-end electronic sector will not emerge if markets alone
determine the outcome
○ But if government sees this industry as a priority industry (which it is),
then gives it fiscal incentives (e.g. income tax deductions, while it is
developing), improves the provision and costs of electricity, tell DOJ and
the legal sectors to provide laws and institutions that will protect these
high-end electronic industry, provide space for them in the export
processing zones, then perhaps the industry will rise and thrive.
○ Coordination failures imply the government and other players must do
things and arrange things to make viable industries profit and thrive.
● THE FIRST MOVER PROBLEM
○ Similar to the previous market failure (coordination failure), suppose an
innovator has a new invention or new product that will benefit many
industries (e.g. a device that will reduce electricity usage by 50%).
○ The firm has to be protected from copiers – gaya-gaya – which will steal
his product, sell it cheaper and bring down his business. Without this,
this guy will not invest.
○ So government has to give him a limited patent or franchise for this
product and even give him fiscal (tax) incentives to make him improve
this product and marketable. Otherwise, he will not introduce the
product in the market.
● DEBATE AMONG ECONOMISTS, ESP IN THE PHILIPPINES
○ Coordination failure and first mover arguments, as well as many
positive externality arguments (promote firms that will benefit the
economy as a whole) may lead to what is called industrial policy
wherein the government will pick ‘winners’ and give special privileges to
firms and industries that will have beneficial effects to the economy
