Unit 2 Topic 1: Markets and Efficiency

Subject matter

Topic 1: Markets and Efficiency​

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In Topic 1, students understand that markets can fail when the price mechanism results in a sub- optimal allocation of resources. They examine market failure and explore traditional and innovative measures and strategies using economic criteria, for example socially optimal and/or efficient outcomes. This topic analyses how markets may not always work efficiently and effectively, and the different choices and opportunities that exist when this phenomenon occurs.

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• Describe key concepts using economic terminology, including allocative efficiency, productive efficiency, dynamic efficiency, externalities, incentives, market failure, monopolistic competition, perfect competition, oligopoly, monopoly, goods (public, private, merit and demerit), and market signals.

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• Describe the

  • -  meaning of allocative, productive and dynamic efficiency as these relate to the optimal operation of markets

  • -  economic forces that limit perfect competition and foster an oligopoly market structure in many Australian industries.

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• Compare optimal versus socially desirable outcomes.

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• Analyse the differences between complete market failure (missing markets) and partial market failure.

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• Explain the causes and effects of market failure, including

  • -  how the excesses of boom and bust cycles in economic growth may result in suboptimal and socially undesirable outcomes

  • -  the concepts of positive and negative externalities of production and consumption with a diagrammatic representation of the welfare loss/benefit associated with them

  • -  the difference between public goods (e.g. fresh air, national security, street lighting) and private goods, why markets might not adequately provide public goods and the concept of the free rider problem

  • -  ways in which the immobility of factors of production might lead to the misallocation of resources.

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• Explain the causes and effects of market failure in at least one of the following situations

  • -  how market power may create a loss of market efficiencies

  • -  the ‘tragedy of the commons’ as it relates to common resources and the problem of ill- defined property rights, e.g. oceans and the atmosphere

  • -  how the lack of common ownership and the problems associated with global coordination limit government options when modifying markets, e.g. global warming and space junk in the outer atmosphere

  • -  asymmetric (imperfect) information that could lead to a misallocation of resources, e.g. adverse selection such as in the market for used cars (lemons), and moral hazard

  • -  how the features and characteristics of the extension of property rights may resolve economic inefficiencies associated with common resources, e.g. economic exclusion zones and economic zones in national parks.

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• Explain different methods of market modification required to correct market failure, including direct and indirect taxation (e.g. Pigouvian taxes), subsidies, price floors/ceilings. Examples of different methods are suasion, tradable permits or direct state provision and regulation.

 

• Select data and information to analyse and evaluate

  • -  strategies to mitigate market failure, to improve equity or efficiency within the economy, including the creation of opportunities for innovation

  • -  the tension between costs to individuals and society of market failure

  • -  intended and unintended consequences of possible mitigation methods.

 

• Create responses that communicate economic meaning using data, information, graphs and diagrams in paragraphs and extended responses to suit the intended purpose.