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This blog brings together some of our resources on information failures in markets.
Click below for:
Mo Tanweer's superb revision notes on aspects of information economics
Try our short Zondle revision quiz on information failureread more...»
According to a report published by the Parliamentary Public Accounts Committee, the Government are currently underestimating how many students will actually pay back their university loans over the coming decades. Currently, the Government estimates that between 35 and 40% of loans to Higher Education students are never paid back - the Committee believes that the rate on non-repayment is much higher and reflects a weakness in the loan collection method. The primary reason for non-repayment is that student details get lost over a period of time particularly if the graduate moves and works abroad or was an EU citizen who has returned to their own country. The method of using the income tax registration process as a way of locating former students has been criticized for not being an effective method of collecting information. It is estimated that the shortfall could be as much as £80 million by 2042.read more...»
If you attended the recent tutor2u revision conferences for up-coming micro-economic exams (look out for the macro workshops and combined micro and macro to come in March) you will have seen how fuel-pricing was used as an example of market failure, government intervention strategies and government failure.
Fortunately, the energy market is a gift that keeps giving to us in the economics world (every cloud has a silver lining) as a report out today (see this link for the BBC version of the story) indicates that Parliament is about to intervene to try and stop the energy companies charging more to customers who pay by cash rather than by direct debit (£114 per year, according to the report).read more...»
The NHS gives us so much value, as Economics teachers, as it serves as a great example of so many areas of theory. The story which heads up the BBC News site this morning is another useful one: NHS waiting time data for elective surgery has been found to be 'unreliable'read more...»
Proposing Government intervention strategies for dealing with externality market failure is a common enough exam question. Many of my students will concentrate on the use of indirect taxation, subsidies, pollution permits or regulation as a method of reducing consumption - often forgetting that the Government can use good, old-fashioned advice as a way of altering purchasing patterns.read more...»
Do consumers of carbonated soft drinks really know how much sugar is in their regular fix? This five minute Newsnight clip is ideal for showing when teaching aspects of the economics of information failure. Will "getting the information in people's hands" help them to adjust their lifestyles? What are the economic arguments for and against direct intervention in the market for carbonated drinks such as a tax on high sugar content products? What are the alternative options or should we simply let consumers make their own choices?read more...»
You may have seen news reports today about the Competition Commission announcing that it will continue its investigation into the car insurance market having decided that there are concerns to be addressed. The headlines concentrate on the market failure caused by the current system of non-fault claimants organising their own replacement vehicles (and then charging the at-fault insurers) but I thought it was just as interesting that the CC are looking at the relationship between the insurers and price comparison websites.read more...»
Here is an example of direct intervention in markets to address some of the information failures associated with the obesity epidemic. US food authorities have taken the first step towards banning artificial transfats, substances that are found in processed foods. They say it is a move that could prevent 20,000 heart attacks and 7,000 deaths a year. According to the BBC website
"Artificial trans fats are used both in processed food and in restaurants as a way to improve the shelf life or flavour of foods. The fats are created when hydrogen is added to vegetable oil, making it a solid."read more...»
I just love the phrase ‘irrational exuberance’. It’s the title of book by Robert Shiller who has just won a Nobel Prize in Economics. But the phrase was coined by the US Federal Reserve Board Chairman, Alan Greenspan, in a speech given at the American Enterprise Institute during the Dot-com bubble of the 1990s.
I will make no attempt to tackle the complex issues that these top Economists were articulating, and instead give a few examples to convey the basics: it’s just not safe to assume economic agents are always making rational choices based on transparent, accurate information.read more...»
It occurred to me recently that the way the government tries to control the population, by encouraging and discouraging certain activities, is rather like the way in which I, as a parent, try to control my child.
Legislation – Setting rules
Imprisonment – Grounding
Fines – Reducing pocket money
Providing information – Using examples from experience, educating
Subsidising – Helping towards payment
State Provision – Buying things for my children
For example, I don’t want my daughter to smoke, drink or take drugs, so what do I do to prevent this? I will provide her with plenty of information as to why she shouldn’t partake in these activities, should she do it anyway, I’ll probably ban these products from my house and also reduce her pocket money in order to prevent her from buying them.
How does the Government try to prevent its citizens from smoking drinking and taking drugs? Well, it provides us with information, legislates against it, setting age limits and laws to try to prevent excessive consumption, and places large levies on alcohol and tobacco products to try to discourage consumption, something akin to what I am putting into place.
Will it work?
In some cases, yes, in others, no and the combination of controls will probably vary for each individual, but as a parent I only really get one chance to get it right for each child, the Government, however, can play the percentage game.
Bringing up children is not all about steering your child away from negativity, much as the Government also wants us to do positive things with our lives. For example:
I see education as quite important in a child’s life and as such, I will try my best to ensure that my daughter takes advantage of the best education available to her and embraces it. How will I do that? I will insist that she goes to school, as will the Government. I will monitor her progress carefully, as will her schools. I will encourage her to work hard, as will her teachers, and I will provide information as to the positive future that will ensue from her hard work, as will Government initiatives.
So, all in all, I am my daughter’s Government, trying to persuade her to make the correct decisions, in her own best interests. I’m sure that along the way, I’ll make some horrendous mistakes, as I’m sure most students would agree, parents don’t always know the best way to deal with situations, much as Governments don’t, largely down to information failure! I’m sure Sophie will make some choices that I won’t necessarily agree with, but as long as I look at the long term and have a clear direction, hopefully I’ll raise a happy, positive individual, much as the Government wants to do with all of us.read more...»
The Office of Fair Trading is investigating potentially illegal pricing activities by six furniture retailers. It all relates to the use of price discounts.read more...»
Okay, hands up, how many of you economics teachers use cigarettes as one of your primary examples of a demerit good? Well, it does fit the bill and it gives you the opportunity to give teenagers a bit of a lecture about healthy living (if only the Ofsted inspector was there for that lesson).
The government's announcement today that they are to postpone the introduction of standardised packaging for cigarettes is bound to meet with some criticism - many will claim that they are giving in to pressure from a tobacco industry which feels that it is already heavily regulated. The concept is that a standard, plain package will put some people off from purchasing cigarettes as there is some research that says that people are attracted to the branding. Personally, until they put the phrase 'don't listen to your peers, they smell' on the box I'm not convinced the plan would have much impact anyway.
What intrigued me more about this story, is the fact that the government have postponed the plan until the impact of standardised packaging has been more closely studied in Australia (where the policy already exists). So there you go, not only is this a story about cigarettes as a demerit good but it is also an example of the government attempting to avoid policy failure. The government argues that it shouldn't spend money on implementing policies and then policing the tobacco firms and retailers if the impact of the programme is minimal. In a sense, the government are arguing that taking its time over this plan may save money in the long run or enable it to spend its scarce resources on a policy that has more impact.
The emergence of a competitor product can often send shock-waves through markets of established products where profits have been more or less guaranteed for decades. Will e-cigarettes have a similar effect on the tobacco industry? And is this an emerging industry in need of greater government regulation and taxation?
Firstly, I hope the first AS exam went well, whether that was macro (OCR), micro, and whether for the first time or a retake. I also hope that in amongst the revision you’re in the market for a more random blogpost…
This one’s a topic on which Paul Ormerod would have something to say. On NPR’s Planet Money radio show/podcast, they’re launching a T-shirt, and using this as a stimulus for a whole set of reporting on its genesis, from cotton subsidies to its design. The latest podcast investigated the colour of their T-shirts. “What’s the economics in that?”, I hear you cry…
Here is one of the most blatant examples of fraudulent miss-selling one might ever come across. A UK businessman has been convicted of three counts of fraud over the sale of bogus bomb detectors - their use in Iraq may have cost many lives - read this articleread more...»
AS Micro students will be gearing themselves up for a key period of intensive revision over the coming days and weeks. For most, being able to analyse and evaluate government intervention in markets is crucial to scoring well in exam questions and reaching those top grades.
Evaluation is not a skill that can be learnt overnight. It requires plenty of attempts to get the evaluative style and approach working well.BTW, if you are revising market failure I highly recommend Matt Smith's Scoop.It Board - full of great applied examples on this big area for the Unit 1 economics exam! Click here to view it read more...»
A tax on the calories contained in soft drinks is around 6% more effective at reducing obesity than a general tax on soft drinks – but the effect is only a drop in people’s weight of around 1.6 pounds per year. These are the findings of research by Wei Xiao, to be presented at the Royal Economic Society’s 2013 annual conference.
The study analyses the buying patterns of 10,000 American households by looking at data on soft drink purchases from supermarket scanners. Based on the calorie content of soft drinks and the medically accepted view that an intake of 6.614 calories leads to a gain in weight of 1 gram, the author simulates the effectiveness of various soft drink tax policies on people’s weight.
The research suggests that a tax that targets the calorie content will be more effective than a universal tax on soft drinks – as some soft drinks are healthier than others. But the author admits that ‘although an obesity tax on soft drinks can cause weight reduction, the effect is small’, adding that even without any dietary changes, ‘a human’s weight can change in the region of one pound in a day’.
Schools and College up and down the country are preparing for all sorts of different activities for the Comic Relief Red Nose Day this Friday (15th March). Are you doing anything with your class?
Here is a ready-made Powerpoint game to run for approximately 20 to 25 minutes in your class this Friday. Whilst being a fun, team-based challenge, the multi-choice questions are all about facts and figures related to the causes that Comic Relief are attempting to support. As such, the information contained within the game should prove a useful stimulus for discussion within your class about the causes of poverty in Africa, as well as alcohol-abuse and other social issues within the UK. It could also prove a useful tool with discussing why these problems exist and what government solutions could be implemented (as well as asking why they haven't already been put in place!).
Click on this link to go to the Powerpoint file that contains the game.read more...»
The subject of obesity is an increasingly important topic in the study of market failure. Its consequences are severe and go right to the heart of the ‘inefficient allocation of resources’ economic concept of market failure. Overconsumption of a number of demerit goods are one of the many causes of this growing epidemic and worrying trends and statistics can be found here with this BBC video clip also providing a useful overview on the facts behind global obesity. The UK is one of the most obese nations in the world with about a quarter of adults classed as obese and that figure is predicted to doubly by 2050.
Tragedy struck at a mid-week game played during the holiday season in Football League Division Two. The pies ran out in the home supporters’ bar. The incident may seem trivial to those not involved. Yet it illustrates some important themes in economics, which have even gained their inventors the Nobel Prize.read more...»
Hard sell and low standard - a new report on the UK cosmetic industry has found deep-rooted problems in the selling of plastic surgery services and highlights class market failure issues of miss-selling and information failures. Many vulnerable consumers complain of being pressured into surgery and the report argues that some providers use cut-price and time-limited deals to sell cosmetic treatments in a similar way to the flogging of double-glazing. Free consultations also seen to cause consumers to feel pressurized into having surgery. The review, led by the medical director of the NHS, Sir Bruce Keogh, was set up because of the safety scare involving breast implants made by the French firm, PIP.
Here are some news videos on this controversial issue - it is a fast growing market but one with huge risks for those with cosmetic needs and wants.read more...»
An updated glossary of key terms for the Unit 1 Economics paperread more...»
Liz Veal (Editor of econoMAX) writes: Here in the UK we take for granted our education – my daughters have the same educational opportunities as my son; my sisters and I had the same chances as my brother. Education for all, irrespective of gender, is highly valued in our society and we are well-aware of the private and external benefits of education. In economics, we teach that the market would fail to provide enough education as it would be under-consumed because of the extra benefits to society that private individuals do not appreciate. This information failure is overcome with public sector provision of education, compulsory by law until aged 16.read more...»
An A-Z glossary for the Unit 1 Micro courseread more...»
I'm sure you don't have any problems convincing your students that education is a merit good/service. Every so often, however, it may be difficult for young people in the UK, aspirational and aiming high, to see how their own learning impacts so positively upon the wider society. Although we constantly debate the quality of education in the UK and strive to improve, many young people will take opportunities to access schools and colleges for granted - perhaps arguing about local differences and the cost of higher education but rarely about actual access to basic education. With such relatively high levels of literacy and numeracy amongst British youngsters it is difficult for them to imagine a society where this is not the norm. The Waseela-e-Taleem initiative in Pakistan, however, could prove a useful example of how government intervention into education is about more than just the structure of assessment and paying teachers - but a country's drive to improve access to basic education and shift its economic as well its political and sociological prospects.read more...»
Here is a terrific example from Matt Smith of how to use Scoop-It to curate lots of useful examples of market failures and associated interventions. Click here for Matt's Scoop-It on Market Failure
The Danish government has opted to bring to an end a policy intervention designed to curb consumption of high fat foods. The measure - introduced in the autumn of 2011 - added £1.50 per kilo of saturated fats in a product but the experiment will end because of fears over inflated food prices and domestic jobs being put at risk. Food manufacturers complained of increased compliance costs and there was some evidence of a rise in cross-border shopping to avoid the tax. A proposed new tax on sugar has also been cancelled.
Now, tutor2U is an organisation dedicated to supporting and building communities for teachers and lecturers. So, if I post a blog that criticises the report released today by Ofqual which suggests that some teachers over-graded coursework (particularly in English) during this summer's GCSE assessments you might accuse me of bias. To paraphrase Jeremy Clarkson: "You would say that - you drive a Citroen Picasso." However, in my never-ending pursuit of trying to find examples that resonate with young students of economics, is it possible to draw parallels with what happened during the GCSE assessment this year, and the mistakes made within the banking industry that lead to the current recession?read more...»
Assessment failures were 'clearly responsibility of officials and not ministers', Philip Rutnam tells former transport secretary
If the Department of Transport is too incompetent to run a supervised franchised system, how viable is the alternative of a fully nationalised system?
Micro insurance is a growing sector within developing country finance. The number of people covered by micro-insurance has increased almost 6.5 fold in five years, reaching nearly 500 million worldwide, with China and India leading the charge. Micro-insurance attempts to protect poor people against risks arising from accidents, illness, a death in the family or the damage caused by natural disasters - in exchange for insurance premium payments tailored to their needs, income and level of risk.read more...»
This blog provides a glossary of many key market failure termsread more...»
The pay-day loan boom is a symptom of more than three decades of financialization in the UK economy. Households and also some businesses are using the loans made available by companies such as Wonga. But borrowing from them involves astronomical rates of interest on an annualised percentage basis. In this clip we see how pay day loan businesses are becoming an ever more frequent sight on our high streets - but are tehey targeting the poorest and most vulnerable in society? Should regulators get tougher on them? Are they a sign of these difficult times?read more...»
The Earthrise series from Al Jazeerah news provides some super short case studies relevant to AS and A2 economics courses that cover environmental market failures, innovations in government interventions and many vivid examples of threats to sustainable growth and development for many countries around the world.
Our Storify series below provides a regularly updated selection of news videos from the Earthrise series.read more...»
There is growing interest among policy makers about the importance of protecting and enhancing natural capital to support sustainable growth and development. I have put together a selection of recent news video resources on natural capital that might be useful for students and teachers who are new to the idea and who might want to look at it as part of their study of environmental and development economics.read more...»
The scale of the fine is staggering, Glaxo SmithKline has been found guilty of off-label marketing - an illegal strategy - GSK targeted the antidepressant Paxil at patients under age 18 when it was approved only for adults, and promoted the drug Wellbutrin for uses it was not approved for, including weight loss and treatment of sexual dysfunction
This is corporate irresponsibility on a grand scale as this new report makes clear.read more...»
Alcohol-related accidents are the leading cause of death and serious injury for victims of car crashes in France and the government has decided to introduce a strong behavioural nudge by making it compulsory for every car to have a portable breathalyser kit in their vehicles or risk a fine. This applies to every vehicle including those driven by tourists. Vehicle owners will have until November 2012 to get used to it before the fines are imposed.
Having a breathalyser in the glove box or on the front passenger seat might well be an effective reminder for people before they turn on the ignition. Reminders of our mortality and/or our morality can often prime us to make safer, better choices. I applaud the French government for introducing this new law. All motorists must also have with them a high-visibility safety vest and a warning triangle.read more...»
Here is an innovative advert from Ogilvy Asia emphasising a behavioural economic idea that reminding yourself of the consequences of a choice can often be a strong deterrent or lever to sustain a change of lifestyle.read more...»
For markets to work, there needs to be symmetric information i.e. consumers and producers have the same level of knowledge about the products, and they know everything there is to know about them. Asymmetric information occurs when somebody knows more than somebody else in the market. This can make it difficult for the two people to do business together. This is an example of information failure in a market
This is a revision blog on the concept of de-merit goodsread more...»
There are many different market failures when it comes to understanding some of the key environmental problems and challenges of the age. Addressing, attacking and correcting for complex and multiple market failures requires pointing to different policy instruments / interventions. Together can they make a sizeable difference to consumer and business behaviour and lead us away from a “business as usual” approach?read more...»
In a fresh move to reduce consumption of cigarettes, legislation has come in force banning the displays of cigarettes for sale in large retail stores. The display ban will apply to shops of more than 280 sq m (3,014 sq ft). Newsagents and small stores can display cigarettes until 2015, giving them time to refit shelves and cabinets.. It is part of the armoury of interventions that have been tried over the years to change consumer behavioural - from real terms increases in cigarette taxes to bans on advertising and ever-stronger advertising and health campaigns. The focus of the ban is to influence younger smokers by removing cigarettes from point of sale display - will it be effective?
This news report below from Al Zajeerah looks at the new measureread more...»
The supply of health care in the UK is an important economic, social and political issue. Demand for health care treatments grows year by year as the population expands, ages and as incomes rise. For millions of people private health care is regarded as a necessity even though the NHS provides a vast range of services free at the point of use. Treatments such as cosmetic surgery, hand surgery, laser eye treatment, physiotherapy, weight loss services and hip and knee replacements are offered by a range of private sector providers in addition to state health care facilities.read more...»
One of the top bankers in the City of London has been fined £450,000 by the Financial Services Authority (FSA) for providing inside information to a prospective client. This is an example of asymmetric information and market failure. Inside information about likely deals in the markets is extremely valuable and the FSA is an agency of government given a key role of monitoring the behaviour of market participants to ensure that it is not abused.
Here is one of the offending emails
“I thought I would update you on discussions that have been going on with a potential acquirer of Tony Buckingham’s business. Tony, advised by myself, has deferred engaging with the client until Thursday of next week although we know they are very excited about the recent drilling results of Heritage Oil … I believe that the offer will come in in the current difficult market conditions at £3.50-£4.00 per share. I am not trying to force your hand, just wanted to make you aware of what is happening”.
Inside information is a common feature of many markets - from share-trading to betting on the racecourses - this case is going to a tribunal
Teresa May has copied Nicola Sturgeon’s proposals for minimum prices of alcohol which appeared in Scotland last year. Last year’s budget had significant increases in excise duties on stronger beer, lager and cider.
This resource from the Centre For Policy Studies may help pupils and teachers to evaluate different forms of government intervention and their effectiveness.
Here is an example of the law of unintended consequences where unlikely side-effect is a thoroughly welcome positive spillover effect. Researchers are finding that the number of premature births and exceptionally under-weight babies in Scotland is falling - watch this video - and then consider why this might be happening.
Scotland was the first country in the UK to ban smoking in public places, followed by Wales, Northern Ireland and England in 2007. Several years on, nearly one-in-five of mothers to be still smoke - how sad.
No one is in any doubt that smoking kills and for half a century the Royal College of Physicians has been warning of the damaging health consequences of nicotine consumption and addiction. They continue to campaign for higher prices and tougher laws on advertising and packaging to curb consumption - even today one fifth of the adult population smokes. Smoking continues to kill around 100,000 Britons each year and unless smokers give up their habit, 100 million years of life will be lost in the UK, according to experts. Channel 4 news reports on changing social norms and the battle to change behaviour. A good historical perspective on information gaps.read more...»
Economics is a social science involving the study of human behaviour. we know that binge drinking is an economic and social issue that probably requires a range of policy interventions to address effectively over time. This BBC news magazine article offer ten policy prescriptions - students can easily add to the catalogue - but provides a really good example of how to build good evaluation into an AS micro market failure / government failure question.
The crucial issue of how best to tackle climate change and make significant progress towards a low-carbon economy is one that gives students tremendous opportunities to hone their analysis and evaluation skills. A few weeks ago the Australian government was successful in getting through the Senate proposals for a new carbon tax and in this blog we link to some excellent video reports on the background to this decision.read more...»
This news report looks at the human cost of an example of the tragedy of the commons - illegal logging in the south Philippines which contributed to tens of deaths from the effects of flash flooding. Ecosystems and economic prospects are damaged at the same time because of failures in environmental management.read more...»