Covid raises many problems for society and offers quite a few examples of market failure. These include:
Externalities. A young person catching Covid may face few personal costs, but there is an external cost because they may transmit to more vulnerable people.
Information asymmetries. There is a lot of misinformation about Covid and vaccines. This makes it more difficult for individuals and business to make rational decisions.
Monopoly power. Vaccines patented by large multinationals. Supply is dominated by a few of the richer countries.
Public good – Improving public health is a public good (non-rivalry/ non-excludable benefits). But, there is an incentive to be a free-rider on other people who make efforts to improve health.
Inequality. Lockdowns and social restrictions have affected different groups in different ways. Some jobs (typing at home) have done well and workers have increased personal savings. Other sectors of the economy have suffered from economic restrictions and may never recover.
The broken window fallacy states that if money is spent on repairing the damage, it is a mistake to think this represents an increase in economic output and economic welfare. If money is spent on repairing a broken window, the opportunity cost is that individuals cannot spend money on more productive goods. The broken window …
Definition – Opportunity cost is the next best alternative foregone. If we spend that £20 on a textbook, the opportunity cost is the restaurant meal we cannot afford to pay. If you decide to spend two hours studying on a Friday night. The opportunity cost is that you cannot have those two hours for leisure. …
The throw-away economy refers to the prevalence of consumer goods which only last for a short period of time. When they stop working / no longer relevant, we throw them away and replace them with new goods.
This is in contrast to an economy where resources are more scare – and if a good is purchased, we expect to make it last a considerable time – repairing if necessary.
For example, in the past, if our socks had a hole, we would sew them up (‘darning’ your socks). But, these days, if socks get a hole, it is more convenient to throw them away and buy some cheap socks instead.
If average wages are £10 an hour. Why spend 30 minutes sewing your socks, when you can buy a new pair for £3? In the past, wages were much lower compared to prices. If you only earnt £1 an hour, then it is worth sewing your socks to save buying a new pair for £3.
Therefore, rising real wages make a throw-away economy more likely.
Repair shops
TV repair. Photo Katie Chao and Ben Muessig – Flickr
In the past, there were many TV repair shops – if your tv or electronic goods broke down, you would try to have them fixed. In today’s world, if a TV broke down, we would be liable to throw away the TV and buy a new one. It is not so expensive and electronic goods are always offering new features. After a couple of years, your electronic goods can feel ‘outdated’ pretty quick. I have a stack of CDs I don’t play in CD players any more.
The problem of the tin openers
Broken tin opener from a Pound Shop
The inspiration for this post has been the number of tin-openers we have got through in the past 12 months. We have bought four tin openers, all of which have ceased working after a short period of use. In each case, we have thrown it away and bought a new one. The first two were from Sainsburys and Asda. They cost about £4 and looked fairly robust. But, after a few weeks, they stopped working properly, and then failed completely. My lodger uses the tin-opener most, so I told him since I paid £5 for a tin-opener and it stopped working, he might as well go get one from a Pound shop. The first tin opener did open one can of Heinz soup then it snapped. 99p to open one tin! That is called a false economy!
He took it back to the 99p shop and the workers laughed. They obviously got returned tin openers all the time. He got a replacement, but that broke straight-away, even before opening a tin.
A list of different types of economic goods. Income elasticity of demand and types of goods Income elasticity of demand (YED) measures the responsiveness of demand to a change in income. Normal good A normal good means an increase in income causes an increase in demand. It has a positive income elasticity of demand YED. …
An economic good is a good or service that has a benefit (utility) to society. Also, economic goods have a degree of scarcity and therefore an opportunity cost.
This is in contrast to a free good (like air, sea, water) where there is no opportunity cost – but abundance. Free goods cannot be traded because nobody living by the sea would buy seawater – there is no point.
However, with economic goods where there is some scarcity and value, people will be willing to pay for them (in some form).
Another feature of an economic good is that if it can have a value placed on the good, it can be traded in the marketplace and valued using a form of money.
An economic good will have some degree of scarcity in relation to demand. It is the scarcity that creates a value people become willing to pay for. It is the scarcity which creates opportunity cost. – For example, if we pick apples from a tree, it means that other people will not be able to enjoy them. If we devote resources to mining gold, the opportunity cost is that we can’t devote this time and effort to growing corn.
Readers Question: Can endangered plant/animal species be economic goods? If so then why?
“Dead as a Dodo” But, was the Dodo an economic good?
Firstly, do endangered plants/animal species have a value to man?
Many endangered plants and species do have a benefit to humanity, even if we are not aware of them. For example, rare plants may hold the key to creating a vaccine for a disease. If we allow the plant to become extinct, then we lose this bio-diversity and future potential to treat human diseases. This is a clear example of how endangered plants could have a very high economic value.
It may be harder to make the case for endangered species. You could argue that some reptile on the verge of extinction has little or no value to humans, therefore some might not class it as an economic good.
However, others may disagree, they argue that when considering economic value, we shouldn’t just consider narrow human interest. We could argue that we should look at the issue from a less human-specific perspective. We should see all life as having an intrinsic value.
Furthermore, ecologists may argue that protecting the biodiversity of the planet should give joy to humans – we should get utility and satisfaction from being guardians of the planet rather than destroyers of life. Therefore protecting so called ‘useless’ species can actually give utility to humans because we can feel ‘good’ about being responsible citizens of the planet.
The difficulty is that a strict definition of an economic good says that the value of the good should have some market value and be traded. It is hard to put a value on the benefit of saving a rare species from extinction. But at least, some people would spend money to save a species from extinction because they feel it is a worthwhile act. Therefore, the rare species do have an economic value.
Definition: The Life-cycle hypothesis was developed by Franco Modigliani in 1957. The theory states that individuals seek to smooth consumption over the course of a lifetime – borrowing in times of low-income and saving during periods of high income. The graph shows individuals save from the age of 20 to 65. As a student, it …
Readers Question: Can price discrimination be of benefit to consumers?
Price Discrimination involves charging a different price to different groups of consumers for the same good. Price discrimination can provide benefits to consumers, such as potentially lower prices, rewards for choosing less popular services and helps the firm stay profitable and in business. The advantages of price discrimination will be appreciated more by some groups of consumers.
Benefits of Price Discrimination
In the above diagram, there is no single price which enables the firm to make normal profit and stay in business. They would need price discrimination to increase profits.
Allows an unprofitable business to avoid going bankrupt. In some cases, it may be possible that there is no one price that would enable a firm to make normal profits. (i.e. average costs would always be higher than demand curve) However, price discrimination may enable the firm to turn a loss into a small profit. This means that a business activity can keep going, rather than closing down. This is obviously beneficial for consumers because it increases their choice of goods and services. An example might be train services. Without price discrimination (off-peak, peak) train companies would make a bigger loss and may be discontinued.
