Market

Failure

Debrief of Visit to Tuas South Incinerator Plant

Why is there a need to incinerate our solid waste? Why cant Singapore
have more landfill? High Opportunity Cost

How much of Singapores solid waste is incinerated?

90%. We only have one landfill in Semakau island

What are some benefits of incinerating our solid waste?

Is it just the revenue gained from incinerating the waste and from the electricity generated
from the energy emitted through incineration? Are there are other benefits?

What are some costs of incinerating our solid waste?

Is it just the private cost of production? Are there additional cost due to the incineration.
Possible pollution to the environment leading to higher healthcare cost?

Are we over-consuming?
Should we reduce the amount of waste?

Watch this 20 min online video to

find out about the way we make,
use and throw away all the Stuff in
our lives.
The Story of My Stuff

Summarising the video

Fall in cost of production
increase in production and supply of good and services

Increase income and advertisements

increase in demand for goods and services

Both increase in demand and supply

increase in consumption of goods and services
increase in waste generated
increase incineration
increase pollution + global warming as the adverse side-effects
external cost on society not considered by price mechanism which
consider private benefits and costs in their decisions.
market failure

Need for Govt Intervention

Scarcity
Limited resources relative
to unlimited wants

Resource allocation
What, how & for whom to produce?

Allocation
mechanism

Outcome of
allocation

Market Economy adopts the Price

Mechanism) v.s. Govt directives

What is considered desirable?

Judging criteria?

Characteristics of a Market Economy

Private ownership of fops
Economic freedom
Freedom of choice
Freedom of enterprise
Aim is to promote self-interest
Firm aim to maximise profit
Consumers aim to maximise satisfaction
Competition exists
Among firms, consumers and factor owners
Use Price Mechanism to allocate resources

How Price Mechanism works to determine what

and how much to produce
Cost / benefit

Surplus

Mkt SS

Consumers express their demand

through the prices that they are
willing and able to pay

Producers respond to the prices

and supply accordingly, based on
they are willing and able to accept
When Price is lower than Pe, there will
be a shortage. Shortages cause
prices to rise
This gives producers incentives to
increase Qty SS

Pe

Shortage

Mkt DD
Qe

When Price is above Pe, there will be

a surplus.
Surpluses cause prices to fall
Production becomes less profitable
and Qty SS fall

Quantity

But the Price mechanism will achieve

economic efficiency only if the
conditions of a perfect market is met.
In reality the market often fails

Hence price acts as automatic

signals which coordinates the
actions of consumers and
producers who seek to maximise
their self-interest

Why does
market fail?
How to rectify
this failure?
Any problems with
the solutions?

Why Market Fail

public goods
merit goods

demerit
goods

externalities

market
power
imperfect
information

market
failure

immobility
of factors of
production

Market failure
1) So what is market failure?
Market mechanism fails to allocate
resources efficiently

2) What is allocative efficiency?

It is the outcome where resources cannot
be reallocated to make someone better
off without making another worse off.

why does the market fail?

Take a closer look at the conditions of a
perfect market
1) Many buyers and sellers, assumed to be
rational in their decision making
2) No barrier to entry and exit
3) Homogenous goods
4) Perfect information
5) Perfect factor mobility
6) No externalities

why does the market fail?

If buyers and sellers are assumed to be
rational in their decision making, would
they consider external effects on third
parties?

No

Government intervention
Government intervention to influence the allocation
of scarce resources achieve an improvement in
economic and social welfare [rationale of policy].
Types of government
intervention?
Subsidise / Tax
Educate / Regulate
Govt Provides / Ban

Taxes
WHO

This is a charge levied on the producers

by the government in order to
RATIONALE
discourage them to produce or supply a
Price
certain good or service.
How does a tax work?
Increases producers cost of
production more expensive for
producers to produce
Producer is less willing and able to
produce produce less fall in
supply leftward shift of supply
IMPACT
curve

Quantity

Taxes
Assuming that demand
remains unchanged
fall in supply to S
+ tax consumers
end up paying higher
price of P2

IMPACT

WHO

subsidies

This is a payment of money by the

government to producers to
encourage them to produce and
supply a certain good or service.
How does a subsidy work?
Decreases producers cost of
production cheaper for
producers to produce
Producer is more willing and able
to produce produce more
rise in supply rightward shift
of supply curve

RATIONALE
Price

Quantity
IMPACT

subsidies
Assuming that
demand remains
unchanged rise in
supply to S + subsidy
consumers end
up paying lower price
of P2

IMPACT

Evaluation of Taxes
FRESH
F Feasibility
R Root cause
E Effectiveness
S Side effects
H time Horizon

CRITERIA

Consequences / Impact / Effects

+ve impact
E It is adjustable.
S It provides government with

revenue which can be used to finance

other types of expenditure (healthcare,
education etc.)

-ve impact / limitations

F Difficult to impose taxes as it is
politically unfeasible.

E Difficult to determine exact

amount of tax as the required info. is

too vast. If tax is too little or too much
economy moves from one inefficient
allocation to another, w/o necessarily
improving the situation

E How much quantity is is

uncertain

S output by firms may UN

Evaluation of subsidies
FRESH
F Feasibility
R Root cause
E Effectiveness
S Side effects
H time Horizon

CRITERIA

Consequences / Impact / Effects

+ve impact

-ve impact / limitations

S Increased output by firms may

F Difficult to remove subsidies in the

raise employment level

future once it has been implemented.

S May improve equity, thus ensuring

E Difficult to determine exact amount

that citizens welfare is taken care of

by the governments action.

of subsidy due to imperfect info. If the

government assesses wrongly the
amount resource misallocation

E How much quantity is is uncertain

S Govt spends less elsewhere

opportunity cost of that subsidy in terms

of other government projects forgone.

takeaways
What is market failure?
Why does the market fail?
Why do governments intervene? Is it just to
correct market failure?
Implications of government intervention?
Is government intervention always desirable?
think about this!