Understanding Market Failure

• The topic under discussion is market failure.

What is Market Failure?

• The market regulates the distribution of goods through interactions among market participants.
• Each participant pursues their own interests to achieve the best possible outcome.
• Participants aim to secure the best offers or lowest prices available.
• The maximization of utility by each participant leads to the most efficient distribution of goods.
• Free markets typically lead to the optimal allocation of resources.
• Efficient outcomes are achieved only under conditions of full competition, excludability from consumption, universality of the product, and equality of information.
• When these conditions are violated, it leads to an inefficient market and ultimately market failure.
• The market mechanism of supply and demand does not necessarily lead to economically desirable outcomes.
• Production factors fail to generate the maximum possible yield for the overall economy.
• Essentially, the market cannot efficiently distribute goods, leading to market failure.

Types of Market Failures

• Allocative Market Failure:
  • Involves public goods, excessive market power, and external effects.
  • Requires intervention from the state.
• Distributive Market Failure:
  • Arises from information asymmetries, adverse selection, and moral hazard.
  • The market outcome does not align with societal norms of fairness.
• Cyclical Market Failure:
  • Encompasses short-term instabilities due to economic fluctuations, structural changes, or labor market imbalances.
  • The state intervenes with monetary and fiscal policy to resolve cyclical market failures.
• Public Goods:
  • Funded by the state and provided free to citizens
  • Market failure occurs due to inefficient distribution and lack of competition from the state.
• Market Power:
  • Monopolies and cartels lead to reduced supply of goods/services at high prices
  • Results in decreased purchasing power and reduced prosperity for the population.

External Effects

• Side effects or products that burden third parties.
• These are not factored in or are ignored by active perpetrators.
• Example: Environmental pollution.
• Meat Consumption:
  • External effects: Emissions, land consumption, and pesticides.
  • Leads to contaminated drinking water, deforestation, and climate crisis.
  • Disadvantages for third parties.
  • Addresses both allocative and distributive failures due to external effects and information asymmetries.
  • Meat should be more expensive.
  • Aim to promote ecological production and regulate imports.

Information Asymmetries

• Necessary information for decision-making is incomplete.
• Suppliers are better informed than consumers due to poor communication
• The quality of goods is unknown.
• Lack of information leads to purchasing the cheapest products due to fear of loss-making deals
• Better, more expensive suppliers are pushed out of the market, limiting variety and quality.
• Leads to reluctance to buy or bad purchases, resulting in market failure due to unfulfilled coordination function of the market.
• Product Qualities:
  • Search Qualities (e.g., color) rarely have asymmetries.
  • Experience Qualities (e.g., durability) have asymmetry that can be reduced through warranties.
  • Trust Qualities (e.g., fair trade) have the greatest asymmetry.
  • Labels are not always reliable.

Measures Against Market Failure

• Private Internalization: Incentivize incorporating social effects.
  • Utilizes norms, and responsibility.
• Government Internalization: Regulatory and market-based regulations

Quality Seals

• Opportunities:
  • Guarantees origin, addressing information asymmetries.
  • Allows consumers to focus on regionality and make informed purchasing decisions.
• Challenges:
  • All components of feed do not have to be regional.
  • Still includes environmental burdens like pesticides.
  • Can involve bureaucracy.
  • Program may be exited.
  • Regionalsiegel can lose significance if adopted by large slaughterhouses.

The Magic Rectangle

• Stable price levels, high employment, steady growth, and external balance
• Stable Price Level:
  • Low inflation/deflation, with an inflation rate of <2%.
• High Employment Rate:
  • Seeks full employment to avoid output losses and unemployment
• Adequate Economic Growth:
  • Steady rise in GDP (goods & services) to increase income
• External Economic Equilibrium:
  • Balance of imports & exports; surplus leads to debt/dependence on other countries.
• Erweiterung zum Magischen Sechseck (weitere Erweiterungen könnten diskutiert werden, wie Nachhaltigkeit der Staatsfinanzen) The "magic" is that simultaneous achievement, if possible, is very difficult

Conflicting Goals

• Full Employment vs. Price Stability:
  • High employment increases wages and demands, elevating inflation.
• Economic Growth vs. Environment:
  • Growth increases resource consumption, and pollution.
• Price Stability vs. Economic Growth:
  • High inflation hampers investments and slows growth.
• Full Employment vs. Economic Growth:
  • Growth leads to employment but may strain resources. Harmonious Aim Realization: The Stability Law aspires to minimize these conflicting goals through balanced economic policy to achieve harmonic aim realization.

Theories

• Supply- and Demand-Oriented Economic Theories

Increasing Minimum Wage to €15

• Pros:
  • Higher purchasing power and consumption due to better income.
  • Increased demand boosts company sales.
  • Reduces wage disparity pushes entire wage curve upward.
  • Shift employment to more productive jobs➔more efficient overall economy.
  • Lack of workforce shortage implies fewer unemployment increases.
  • Good remuneration increases loyalty and motivation.
  • Prices would rise, and there would be little inflation.
  • State gains: Higher tax revenues, reduced social expenditure, improved security for the aged.
• Cons:
  • Companies bear the costs, cutting profits and investments.
  • Higher wages are passed on to consumers, raising product prices.
  • Employees are dismissed
  • If wages cannot be paid.

Special Funds

• Suggestion of a coalition talk

• Only 0.35% of GPD allowed for debts

• Special funds earmarked: 500 Mrd. for infrastructure

• Defense expenditures = 1%

• DE Kreditwürdigkeit kritikCDU

• 2/3

• New Energy high cost

Generational Equity

• can be promoted
• long run climate
• benefit
• Society = positive
• Roads