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

CrashCourse

22 Jan 201612:12

EducationalLearning

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TLDRThis economics video explores market failures and government interventions to address issues like public goods, externalities, the tragedy of the commons, and climate change. It explains concepts like free riders, incentives, regulatory policies, and market-based policies. Examples given include overfishing, pollution, education funding, smoking, and cap and trade programs. The hosts conclude that free markets and government interventions both have limitations, so the key is finding the right balance between the two to optimize social welfare.

Takeaways

😊 Markets can fail to allocate resources efficiently due to issues like the free rider problem, tragedy of the commons, and externalities.
😮 The free rider problem happens when people benefit without paying, undermining the funding for public goods like national defense.
😲 The tragedy of the commons occurs when individuals exploit shared resources, despite it being against the group's interests.
🤔 Externalities are costs or benefits not reflected in market prices, causing overproduction of goods with negative externalities.
😃 Governments can address market failures through regulations like pollution limits or market policies like taxes and subsidies.
🧐 Non-excludability and non-rivalry cause private firms to under provide public goods like street lighting.
👍 Education has positive external benefits like higher earnings and tax revenue.
😥 The global nature of issues like climate change exacerbates the tragedy of the commons.
🤨 Cap and trade programs can successfully address negative externalities like pollution.
😀 Cooperation between free markets and government intervention is needed for the best outcomes.

Q & A

What is the free rider problem?
-The free rider problem refers to people who benefit from something without paying for it. In the example given, if too many people choose to pay less for fire protection, there won't be enough money to fund the fire department.
What are the two characteristics of a public good?
-The two characteristics of a public good are non-exclusion, meaning you can't exclude people from benefiting even if they don't pay, and non-rivalry, meaning one person's consumption doesn't reduce the amount available to others.
What is the Tragedy of the Commons?
-The Tragedy of the Commons refers to the overuse and exploitation of common resources that everyone has access to, like fish stocks or rainforests. Individuals have an incentive to exploit them for personal gain.
What are externalities?
-Externalities are costs or benefits of market transactions that affect third parties outside the transaction. Negative externalities impose costs, while positive externalities provide benefits.
What are some solutions to negative externalities?
-Governments can use regulatory policies like bans or quotas, or market-based policies like taxes and subsidies to reduce negative externalities.
What is cap and trade?
-Cap and trade is a market-based policy where the government issues limited pollution permits that can be traded. It provides incentives to reduce emissions.
Why is climate change hard to address?
-Climate change involves global externalities, where individual countries have incentives to free ride and let others reduce emissions. Global cooperation is needed.
When should governments intervene in markets?
-Governments should intervene to provide public goods, address externalities, and in other cases of market failure where unregulated markets do not achieve socially optimal outcomes.
What are some examples of market failures?
-Examples of market failures include public goods, externalities, inequality, imperfect competition, and information asymmetry.
What are regulatory and market-based policies?
-Regulatory policies are government rules like bans or quotas, while market-based policies like taxes and subsidies aim to influence market incentives.

Outlines

00:00

😀 Introducing the Topic of Market Failures

Adriene and Jacob introduce the concept of market failures, situations where markets do not efficiently allocate resources. They discuss the free rider problem using an example of an extra credit question, where individuals acting in self-interest can lead to outcomes that hurt the group. They explain public goods like fire protection that require government involvement.

05:02

😟 The Tragedy of the Commons

Adriene explains the Tragedy of the Commons, where individuals exploiting shared resources for personal gain can ultimately destroy those resources. Examples are overfishing, deforestation, and pollution. Environmental economics aims to address these issues.

10:08

😖 Externalities as Market Failures

Jacob defines externalities, costs or benefits incurred by third parties outside the market transaction. Negative externalities like pollution make people worse off. Positive externalities like education benefit society. Governments aim to correct externalities through regulation or market-based policies like taxes and subsidies.

🤔 Using Taxes, Subsidies and Cap-and-Trade

Adriene and Jacob discuss market-based policies to address externalities. Taxes increase costs of negative externalities like pollution while subsidies encourage positive ones like education. Cap-and-trade sets pollution limits but lets companies trade permits. An example was the successful US acid rain program.

🌎 Global Issues Require International Cooperation

Jacob and Adriene note global issues like climate change require international cooperation, not just individual country efforts. Unregulated markets encourage exploiting shared global resources. Governments must work together to effectively address global externalities.

Mindmap

Keywords

💡Externalities

Externalities refer to the costs or benefits of an economic activity that affect someone other than the people directly involved in the activity. They are a type of market failure because prices don't reflect the full costs or benefits. The video discusses negative externalities like pollution from a TV factory affecting people downstream. It also covers positive externalities like the societal benefits of education.

💡Regulation

Government regulation refers to rules that mandate or restrict certain actions. The video discusses regulation as a way to address externalities. For example, the EPA enacting laws to control pollution from factories.

💡Public goods

Public goods are products that are non-rival and non-excludable. Non-rival means one person using it doesn't stop others from using it. Non-excludable means people can't be prevented from using it. The video gives examples like national defense and disease prevention.

💡Free riders

Free riders are people who enjoy the benefits of something without contributing or paying for it. The video discusses how free riders pose a problem for funding public goods like fire protection.

💡Tragedy of the Commons

The tragedy of the commons refers to the overuse of a shared resource when individuals act in self-interest. The video applies it to environmental issues like overfishing leading to depletion of fish stocks.

💡Market failure

A market failure is a situation where the free market fails to efficiently allocate resources. Externalities, public goods, and the tragedy of the commons are examples discussed in the video.

💡Taxes

Taxes are a market-based policy tool that governments can use to address market failures. The video gives examples like taxing cigarettes to reduce smoking or taxing carbon emissions to reduce pollution.

💡Subsidies

Subsidies are government payments that reduce the cost of a good or service. The video discusses using subsidies, like grants for college, to encourage positive externalities like education.

💡Cap and trade

Cap and trade is a market-based policy for controlling pollution. The government sets a limit on emissions and issues tradable permits. This was used successfully to reduce acid rain in the US.

💡Cooperation

The video emphasizes that cooperation between countries is necessary to address global issues like climate change. But individual incentives can undermine collective interests.

Highlights

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The new algorithm achieved state-of-the-art performance on 3 benchmark datasets, outperforming previous approaches

Researchers identified a potential biomarker for early diagnosis of Alzheimer's disease

Statistical analysis showed a strong correlation between A and B, supporting the hypothesized relationship

The theoretical model provides new insights into the dynamics of particle interactions at nanoscale

Experimental evidence indicates the drug may inhibit tumor growth by targeting multiple signaling pathways

The new manufacturing process enables mass production of the device at a significantly lower cost

Survey results revealed interesting generational differences in attitudes toward technology adoption

The study conclusively disproved the long-held assumption that X causes Y

Researchers successfully simulated complex biochemical networks on a quantum computer

The insights from this work could inform policy decisions and guide best practices for sustainable development

Transcripts

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