EXTERNALITY AND MARKET FAILURE

TUTORIAL ACTIVITY 2.1

Read:               Borland, Case Study 4.1 (pages 129-135)

Reflect:             A market system, in the presence of external effects, can produce results that are socially inefficient. In externalities such as GHG emissions, private markets will not normally be able to bring about results that are efficient. Such situations are known as ‘market failures’.

Respond:         Do you think that there would be external effects associated with each of the following? If so, what would be the nature of external effect in each case? Can you think of policies that might deal with each external effect (that is, improve social wellbeing)?

• Being vaccinated for influenza

• A hotel that is located next to an apartment building playing loud music late night

• Cigarette smoking

CLIMATE CHANGE AND MARKET FAILURE

TUTORIAL ACTIVITY 2.2

Read:               Reading 2.2 Stern (2008) ‘Economics, ethics and climate change’, Ch. 2, p.25-34

Reflect:             Stern regards the climate change as the greatest market failure in the history. It entails costs that are not paid by those who create the emissions.

Respond:         (a) What are some of the salient features of climate change that distinguish it from other externalities?

• What are the main tenets of the ethical framework of standard welfare economics?