Exam Notes - Responding to Market Failures PDF

Exam Notes Responding to Market Failures -​ A well functioning market creates jobs, increases wealth, promotes innovation amd raises the general standard of living -​ Market failure → not functioning in a way that is socially optimal -​ This can be from deviations from two types of id...

Exam Notes Responding to Market Failures -​ A well functioning market creates jobs, increases wealth, promotes innovation amd raises the general standard of living -​ Market failure → not functioning in a way that is socially optimal -​ This can be from deviations from two types of ideals: -​ Deviations from an economic ideal (economically inefficient markets) -​ Deviations from a social ideal (socially undesirable results) Deviations from an Economic Ideal -​ An efficient market causes an allocation where no one can be made better off without making someone else worse off -​ Markets are efficient when certain things hold: -​ Complete information -​ Perfect competition (many sellers, many buyers) -​ Contestable markets (no entry barriers) -​ Undifferentiated goods -​ Clear and extensive property rights -​ An effective mechanism for enforcing those rights -​ No transaction, search or switching costs -​ Four categories of market failure are: -​ Insufficient competition -​ In the absence of enough competitive pressure, sellers are likely to overprice and underproduce (e.g. protected monopolies) -​ Can manifest in 3 ways -​ (1) small amount of sellers offering comparable products -​ (2) high number of barriers keeping new sellers out -​ (3) high search or switching costs for customers -​ Information deficiencies -​ Information asymmetry → when one part knows more than the other -​ When this exists, the informed party can take advantage of the situation to negatively affect trade for the less-informed party -​ Joint uncertainties can lead to the following: -​ Trades that do not create value -​ Expected benefits may not be realised -​ Unexpected harms may arise -​ Externalities -​ Transactions between sellers and buyers can affect 3rd parties -​ Business activities create costs and benefits that do not affect them -​ These are externalities - both negative and positive are problematic -​ Negative externalities → leads to overproduction and underpricing of goods causing the externality  -​ Positive externalities → leads to underproduction and overpricing of goods causing the externality -​ Can be solved with clear property rights and a low cost mechanism for negotiating over these externalities -​ Public goods (extreme positive externality) -​ 2 main characteristics -​ Non-excludable → those who have not paid cannot be excluded from their use → susceptible to free riders -​ Non-rivalry → one person’s enjoyment does not affect or lower someone else’s ability to enjoy -​ E.g. national defense -​ Schools are an example of a mix of private and public goods -​ Principal-agent conflicts -​ Transactions are carried out by agents on behalf of principals -​ They are unlikely to act only on behalf of their principals -​ There is always incentive to pursue your own interests above others’ -​ Measures to combat this include monitoring practices such as: -​ Implementing a board of directors for corporate management -​ Implementing auditors in CFR -​ Implementing financial press for financial analysts Deviations from a Social Ideal -​ Social ideals differ from society to society → not a comprehensive set of ideals -​ Four general categories: -​ Morally Objectionable Exchange -​ Most societies don’t allow markets for some goods and restrict markets for others based on morality -​ Societies may suspect that people doing these are likely to be making uninformed decisions or that they create unacceptable negative externalities -​ Appeal to the moral offense of these markets -​ Differs greatly from economic theory → clashes with definitions of individual and social welfare -​ Socially Important Goods -​ Some are given by government while others are produced privately but subsidised publicly -​ E.g. fire protection, libraries, pensions, workers insurance, healthcare -​ Markets left to their own may not produce enough and may not distribute these goods -​ Supporters of these goods appeal to notions of decency and humanity -​ Procedural Fairness -​ As long as market participants voluntarily trade what they own, it is fair -​ Distributive Justice -​ Markets may reward effort, integrity and commitment but they do so unevenly Responses to Market Failures Search for Market-Based Solutions -​ Let businesses search for innovative market-based solutions (societies are dynamic) -​ Can decrease economic inefficiencies or enhance social objectives -​ When the innovations can be turned into competitive advantages, they can be pursued on their own -​ When threatened by less enlightened competitors, industry self-regulation and policing may help assure stability -​ When they work → voluntary, efficient, a degree of stability, low cost to the public -​ Allows business leaders to improve social outcomes while making profit, honoring shareholders -​ May take time Rely on the Government -​ Positioned to improve situation through legislative, enforcement and taxing powers -​ What they can do: -​ Break up monopolies and prevent anti competition mergers -​ Require product testing and disclosure -​ ‘Lemon laws’ can protect consumers from uninformed decisions when sellers do not offer enough guarantees -​ Reduce negative externalities can be reduced through regulation and fines -​ Reward positive externalities through tax rebates -​ Public + socially important goods can be funded and made accessible to everyone -​ Equal opportunity can be encouraged through anti discrimination laws and affirmative action mandates -​ Wealth can be rdistributed through taxes and public welfare -​ Governments can fail and some can be failed states → can even do more harm than good -​ Markets are more global now but laws stop at national borders -​ Governments lag behind innovations → damaging in an era of fast changes ​ Work Through the Social Sector -​ More innovative and flexible than government -​ Do not have the same financial obligations as businesses → usually take a non-profit form which creates credibility and trust -​ Using donations and government funding, they: -​ Provide market-relevant information and product testing -​ Combat negative externalities -​ Deliver public and social-important goods -​ Serve as a channel to redistribuet wealth -​ Advocate for those harmed by market failures -​ Prone to inefficiencies → performance evaluation is ahrd which makes it hard to allocate resources Create Cross-Sector Partnerships  -​ Some creative responses attempt to pull together strength from eahc of the 3 sectors -​ Not easy to do → must take into account political environment and the differnt interests, constituents, capabilities, cultures, biases and weaknesses of each party The Role of Business Leaders -​ Must consider whether and how their firms resources can be properly used Make Your Money, Pay Your Taxes, Obey the Law -​ Rationale is that business leaders have specific and narrow job responsibilities -​ Let elected officials decided whether markets need to be regulated -​ If a business person find a good solution, ut can be pursued but otherwise just focus on business -​ Lack of evidence that the government and the social sector can respond effectively t certain market failures without help from businesses -​ Could increase the risk of ineffective action Provide Input, Expertise, Resources and/or Leadership -​ Right type of involvement varies from issue to issue -​ Option One: provide information and expert opinion to the public policy process -​ Can do this with minimal cost -​ Offer knowledge of markets to help decision makers in the other sectors to design intervention and recognise costs and risks -​ Option Two: take a more active role -​ Can represent their frims in industry associations or public private partnerships Choose Your Path Leadership, Social Capital, and Incentives Promote Successful Fisheries Authors: Nicolás L. Gutiérrez, Ray Hilborn, Omar Defeo Importance of Fisheries & Overexploitation -​ 1 billion people rely on seafood as a primary protein source. -​ 25% of the world’s animal protein comes from fisheries. -​ One-third of fish stocks are overexploited or depleted. Community-Based Co-Management as a Solution -​ Co-management involves fishers, managers, and scientists working together. -​ Benefits: -​ Encourages responsible fishing. -​ Uses local knowledge for better management. -​ Peer pressure enhances regulation compliance. -​ Provides better monitoring and enforcement. -​ Few attempts made to synthesize case studies into a general comanagement model Study of 130 Co-Managed Fisheries Across 44 Countries -​ Variables analyzed included social, ecological, and economic success. -​ Identified 19 key co-management attributes (e.g., leadership, social cohesion, quotas, protected areas). -​ Success was highest when at least 8 attributes were present. Key Factors for Success -​ Leadership → Presence of strong, respected local leaders was the most significant factor. -​ Social Cohesion → Trust, communication, and networked communities helped sustain fisheries. -​ Incentives & Regulations -​ Catch shares (individual or community quotas) reduced overfishing. -​ Protected areas contributed to conservation efforts. -​ Long-term management policies strengthened sustainability. -​ Enforcement Mechanisms: Countries with strong governance had higher success rates. Challenges & Observations -​ Fisheries in high HDI (Human Development Index) countries were more successful than in low HDI regions. -​ Industrial fisheries scored higher than artisanal ones due to better enforcement. -​ Multi-species fisheries faced unique challenges due to mismatched stock mobility and management areas. Implications & Recommendations -​ Co-management is essential for sustainable fisheries. -​ Policies should focus on building leadership and social capital, not just imposing regulations. -​ Spatial considerations and local market control improve outcomes. -​ More interdisciplinary research is needed to compare co-management with top-down approaches. The Struggle to Govern the Commons Authors: Thomas Dietz, Elinor Ostrom, Paul C. Stern​ Challenges in Governing Commons -​ Common-pool resources face threats from population growth, increased resource demand, and inadequate governance -​ Effective governance systems must evolve continuously to address changing ecological and social conditions. Factors for Success -​ Effective commons governance relies on monitoring resource use, moderate rates of social and ecological change, and strong social capital with trust and communication -​ The exclusion of outsiders and rule enforcement at low costs are critical. Global Governance Examples -​ Success stories like the Montreal Protocol (ozone layer protection) highlight the potential of multi-level governance. -​ However, failures like the collapse of the northern cod fishery in Canada underline the importance of integrating local knowledge and robust monitoring. Adaptive Governance -​ Adaptive systems with mechanisms for conflict resolution, rule compliance, and infrastructure development are crucial. -​ Nested, multi-layer governance is necessary for addressing complex, large-scale environmental challenges. Recommendations for Governance -​ Governance must involve analytic deliberation among stakeholders, employ diverse institutional types, and adapt to changing conditions. -​ Institutions should blend top-down and community-based approaches for resilience. Audacious Philanthropy – Study Notes -​ Audacious philanthropy is about solving big, bold problems rather than just addressing symptoms. -​ Requires catalytic funding, cross-sector collaboration, and continuous learning -​ Focuses on scaling impact to drive lasting, transformative change. Five Elements of Audacious Philanthropy To achieve large-scale change, successful philanthropists consistently exhibit these five key elements: -​ Commit to a Big, Hairy, Audacious Goal (BHAG) -​ Define a clear, ambitious goal with measurable outcomes -​ Success stories often involve a moonshot mentality, where organizations rally around a singular, bold mission -​ Example: The Global Polio Eradication Initiative, launched with the goal of eliminating polio worldwide. -​ Drive Demand, Don’t Just Supply It -​ Strategic philanthropy doesn’t just fund programs; it creates demand for change. -​ Uses public engagement, advocacy, and policy influence to shift perceptions and behaviors. -​ Example: Mothers Against Drunk Driving (MADD) successfully changed social norms and laws around drunk driving. -​ Fuel a Movement by Empowering Others -​ Large-scale change isn’t achieved alone—it requires mobilizing networks and engaging communities. -​ Effective philanthropy leverages grassroots activism, local leaders, and public-private partnerships. -​ Example: The anti-smoking movement led to tobacco taxes, advertising bans, and health campaigns. -​ Forge Nontraditional Partnerships -​ Audacious change requires collaboration across governments, businesses, NGOs, and communities. -​ Blending funding models, data-sharing, and cross-sector expertise enhances impact. -​ Example: The Green Revolution, which involved scientists, governments, and private industry to transform agriculture. -​ Learn and Adapt as You Go -​ Iteration and continuous improvement are crucial in solving complex problems. -​ Philanthropy must be data-driven, flexible, and open to course corrections. -​ Example: The fight against malaria has evolved from bed nets and insecticides to vaccine development based on scientific learning. Strategies for Achieving Large-Scale Change The five elements of audacious philanthropy are applied through strategic approaches such as: -​ Influencing Policy & Changing Systems -​ Sustainable change often requires policy shifts and government buy-in.  -​ Philanthropists must engage in advocacy, litigation, and legislative reform. -​ Example: The U.S. marriage equality movement, where philanthropy funded legal battles, public awareness campaigns, and policy lobbying. -​ Harnessing Market Forces for Impact -​ Rather than relying on grants alone, successful philanthropists use market-based solutions to drive progress. -​ Strategies include impact investing, social enterprises, and financial incentives. -​ Example: Microfinance institutions like Grameen Bank, which provide small loans to entrepreneurs in developing countries. -​ Mobilizing Public Will & Social Movements -​ Narrative change and community engagement are key to sustaining momentum. -​ Successful efforts ignite grassroots participation, shift cultural attitudes, and create a sense of urgency. -​ Example: The global climate movement, which has mobilized millions through youth activism, legal action, and policy advocacy. -​ Using Data & Evidence to Improve Outcomes -​ Data-informed decision-making ensures that philanthropy is effective and scalable. -​ Randomized control trials, impact metrics, and real-time feedback loops help refine strategies. -​ Example: The Gates Foundation’s work in global health, which prioritizes evidence-based interventions like vaccine distribution. -​ Taking Risks & Investing for the Long Haul -​ Audacious philanthropy requires patient capital, accepting short-term failures for long-term gains. -​ Funders must be willing to support high-risk, high-reward initiatives. -​ Example: The Rockefeller Foundation’s early funding of mRNA research, which later contributed to the rapid development of COVID-19 vaccines. Challenges in Audacious Philanthropy While large-scale change is possible, barriers exist: -​ Political & Bureaucratic Resistance: -​ Governments may resist outside intervention or policy shifts. -​ Measurement & Accountability: -​ Impact assessment is complex, requiring longitudinal studies and rigorous data analysis. -​ Power Dynamics & Equity Concerns: -​ Critics argue that some philanthropy reinforces elite influence rather than empowering communities. -​ Sustainability Issues: -​ Without long-term funding and community ownership, programs may fade after initial investments. -​ Know the reading and apply the readings to the cases  -​ Make notes on the readings -​ How to fix market failures etc. -​ Don’t worry about the cases -​ CLOSED BOOK