Market & Market Failure PDF

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Class done by Professor Hill...

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Module 1: Markets  Trade requires an economic system for production and distribution  Types of economic systems o Free market: individuals decide how to work and what to buy o Socialism: government control of the means of production o Communism: government control over the means of production and distribution o Mixed economy: some sectors controlled by government, some by private industry  Private industry does not have anything to do with the government  Prices guide consumers to producers  Why do markets work? o Markets typically allow those with the most information to make decisions o Buyers and sellers communicate this information to each other by price  Adam Smith called this “the invisible hand” o What if there is too little of a good being produced (shortage)?  Price rise o What if there is too much of a good being produced? (surplus)  Prices fall Module 2: Market Failure  Market failure definition: market outcome is not socially efficient o Chance to make at least one person better off without making anyone else worse off o Typical problem is that the price is wrong  Market failures o Market power o Natural monopoly o Asymmetric information  One knows more than the other o Incomplete information  Both know the same amount of information and therefore don’t have all the information needed o Externalities  Positive - price too high, quantity too low  Negative - price too low, quantity too high o Public goods o Cyclical unemployment Application: Health Care  The US system is not effect  Health care: the basics o The US has a mixed health care system o Providers are largely private, insurers mixed o Most free market system and it does not compare well to the world  We pay a lot and get middling results o Why is US healthcare so expensive?  Lack of single payer to bargain  Health administration costs

Incorrect preventative medicine incentives No cost effectiveness analysis o Popular but false reasons  Americans are sicker  Obese, less cigs and elderly  More doctors and beds  Actually less  More heroic medicine  Yes but not a big factor  ...