Market failure and the U. Growth in activity. Commercial vs. Is there market failure? The Baumol-Bowen thesis. The organizational climate of the non-profit arts. Public externalities. Concluding policy observations. Americans for the Arts serves, advances, and leads the network of organizations and individuals who cultivate, promote, sustain, and support the arts in America. A major problem of providing health care through the market is that there is likely, in the overwhelming majority of cases, to be an imbalance between the information possessed by the suppliers i.
Also, as many medical problems only occur once, any information acquired may be of no future use; and finally, in contrast to buying a sour instead of a sweet satsuma, any mistaken choices in the case of health care are likely to involve a far greater cost and to be considerably more difficult to reverse; for example, the consumption of poor quality facial plastic surgery.
Similarly, in the case of education , consumers, usually parents, intending to act wisely, may not be able to do so and the consequences of mistaken decisions may be extremely great; education is a multi-faceted, complex process about which there is considerable disagreement, even amongst the 'experts', and obtaining the necessary information on such variables as teachers' qualifications, examination performance, intake according to social class, the incidence of bullying and racial harassment, may be extremely time-consuming and difficult to acquire ; moreover, in the case of higher education, it is usually far more difficult for those who have not experienced it to appreciate its benefits and make wise decisions, as compared with those who have.
As it is generally accepted that education is a prime determinant of life chances, future earning potential and quality of life, mistaken decisions because of imperfect information can have particularly severe consequences. Not only is a lack of information likely to cause market failure, but so too can uncertainty of information - particularly in the case of health care. A situation in which consumers are uncertain about future market information can lead to allocative inefficiency, with too little health care being consumed if state provision is not available.
Few people are able to predict with any degree of certainty the level and type of health treatment that they will require at some point in the future, as the incidence of serious accidents or ill-health are essentially unknown variables, even for the smartest of medical practitioners.
As paying through the market for an operation, hospitalisation or long-term disability would almost certainly involve exceedingly large sums of money, it would be very difficult for individuals to plan their savings and consumption so as to ensure that all future medical requirements could be met; the market in this situation is unlikely to provide the optimal quantity of health care because at the particular point in time when consumers actually need it, they may lack the wherewithal to pay the market price.
Direct government provision of health care, free at the point of contact, overcomes this problem. A possible market-based solution to this problem would be that of private medical insurance; in the same way that it is obligatory for all motorists to take out some form of car insurance, everybody could be required to purchase a minimum level of health insurance to guard against unforeseen contingencies. However, such a scheme is likely to present a number of problems:.
Previously we demonstrated how under monopoly, price will tend to be higher and output lower compared to the case of perfect competition; and as price will be set at a level above marginal cost, and the firm is unlikely to operate on the lowest point of its average cost curve, neither allocative nor productive efficiency will occur.
Thus, where monopoly occurs, the market could not be relied upon to produce an efficient allocation of resources. If education were provided solely through the market, it is likely that spatial monopolies would arise, as various geographical areas would not be adequately populated to support more than one school, college or university i.
Spatial monopoly is monopoly power obtained by a business organisation through locating at a distance from its competitors. Similarly, in the case of health care, market provision would be likely to generate substantial monopoly power, and therefore market failure: as the consumers of medical services lack perfect or even adequate information about the products they consume, scouring the market place for the best deals is not possible, and in this situation the suppliers i.
The economic theory of traffic congestion Possible government responses to externalities Direct government provision Extension of property rights Taxes and subsidies Tradeable pollution rights Regulation, legislation and direct controls Public goods Merit goods Government responses - merit goods Demerit goods Government responses - demerit goods Abuse of monopoly power Inequality Section 2. Merit goods What are merit goods? Government could also choose to by-pass the market all together and take over full responsibility for supplying the socially efficient quantity of merit goods.
This is what happens with State education, healthcare, and national insurance. Government could also cover some of the costs of private sector provision, such as providing free training for doctors, nurses and teachers, who may then work in private hospitals and schools. In addition, government could also encourage private firms to enter the market by offering incentives. For example, private hospitals could be given cash incentives to increase the number of hospital beds available to National Health Service NHS patients, and private schools could be given grants to take state school pupils.
A key problem when trying to increase supply is insufficient knowledge both in terms of how much to increase supply by, and in understanding the effects of intervention, and any unintended consequences. A second approach to merit goods is to increase demand for them. This can be achieved either through lowering price, which would expand demand, or by shifting the position of the demand curve.
What price to set for a merit good is an issue facing policy makers. One option is to provide the service free at the point of consumption, as currently exists with NHS treatment.
This would expand demand to its maximum, but it may encourage over-consumption, with the system becoming clogged-up with free riders and malingerers, diverting resources from the genuinely sick and needy.
With education, a voucher system is a frequently proposed option to encourage demand for merit goods provided by the private sector. This system can be used to create a quasi market. Typical voucher schemes involve parents being allocated education vouchers, which they are then free to spend on any school of their choice.
Parents can combine the vouchers with their own finance to pay for a place at any school — either state or private. Supporters of vouchers argue that they allow a market to be completed effectively and in a way that enables poorer families to have access to the best schools.
Over time, this will drive up the quality of all schools as they compete with each other for scarce vouchers. Finally, demand for a merit good could be increased providing knowledge, so that the consumer can make a more informed appraisal about the benefits of consuming merit goods. Whenever government allocates resources on behalf of citizens, a potential principal-agent problem may arise.
This means that public sector managers and employees may act in their own interests, and not in the interests of the government or taxpayer. In order to solve this problem, regulation may be necessary to ensure that the highest possible standards are achieved. For example, government may establish educational standards such as the national curriculum , and may set national targets for reducing hospital waiting lists.
Regulations can help achieve standards in public healthcare and education that would occur in a more competitive environment. See Demerit goods. Stagflation is a combination of high inflation, high unemployment, and stagnant economic growth.
Because inflation isn't supposed to occur in a weak economy, stagflation is an unnatural situation. Slow growth prevents inflation in a normal
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