IB Syllabus Requirements:
The meaning of market failure: Market failure as a failure to allocate resources efficiently
• Analyse the concept of market failure as a failure of the market to achieve allocative efficiency, resulting in an over-allocation of resources (over-provision of a good) or an under-allocation of resources (under-provision of a good).
Types of market failure:
The meaning of externalities:
• Describe the concepts of marginal private benefits (MPB), marginal social benefits (MSB), marginal private costs (MPC) and marginal social costs (MSC).
• Describe the meaning of externalities as the failure of the market to achieve a social optimum where MSB = MSC.
Negative externalities of production and consumption
• Explain, using diagrams and examples, the concepts of negative externalities of production and consumption, and the welfare
loss associated with the production or consumption of a good or service.
• Explain that demerit goods are goods whose consumption creates external costs.
• Evaluate, using diagrams, the use of policy responses, including market-based policies (taxation and tradable permits), and government
regulations, to the problem of negative externalities of production and consumption.
Positive externalities of production and consumption
• Explain, using diagrams and examples, the concepts of positive externalities of production and consumption, and the welfare loss associated with the production or consumption of a good or service.
• Explain that merit goods are goods whose consumption creates external benefits.
• Evaluate, using diagrams, the use of government responses, including subsidies, legislation, advertising to influence behaviour, and
direct provision of goods and services.
Lack of public goods
• Using the concepts of rivalry and excludability, and providing examples, distinguish between public goods (non-rivalrous and non-
excludable) and private goods (rivalrous and excludable).
• Explain, with reference to the free rider problem, how the lack of public goods indicates market failure.
• Discuss the implications of the direct provision of public goods by government.
Common access resources and the threat to sustainability
• Describe, using examples, common access resources.
• Describe sustainability.
• Explain that the lack of a pricing mechanism for common access resources means that these goods may be overused/depleted/
degraded as a result of activities of producers and consumers who do not pay for the resources that they use, and that this poses a threat to sustainability.
• Explain, using negative externalities diagrams, that economic activity requiring the use of fossil fuels to satisfy demand poses a threat to
sustainability.
• Explain that the existence of poverty in economically less developed countries creates negative externalities through over-exploitation of land for agriculture, and that this poses a threat to sustainability.
• Evaluate, using diagrams, possible government responses to threats to sustainability, including legislation, carbon taxes, cap and trade schemes, and funding for clean technologies.
• Explain, using examples, that government responses to threats to sustainability are limited by the global nature of the problems and the lack of ownership of common access resources, and that effective responses require international cooperation.
HL Requirements:
Asymmetric Information:
- Explain, using examples, that market failure may occur when one party in an economic transaction (either the buyer or the seller) possesses more information that then other party.
- evaluate possible government responses, including legislation, regulation and provision of information.
Abuse of Monopoly Power:
- Explain how monopoly power can create a welfare loss and is therefore a type of market failure.
- Discuss possible government responses, including legislation, regulation, nationalization and trade liberalization.
Pros and Cons of a Carbon Tax:
How to graph an Indirect tax to solve a negative externality of consumption (demerit good) and production
And another review of externalities in general
Theory of knowledge: potential connections
To what extent is the obligation to seek sustainable modes of consumption a moral one?
What knowledge issues are involved in assessing the role of technology in meeting future patterns
of consumption and decreasing the negative externalities of consumption associated with fossil
fuels?
What are the knowledge issues involved in determining what is a rational cost to pay for halting
climate change?
How could we know if economically more developed countries are morally justified in interfering in
the development of economically less developed countries on the grounds of climate change?
How can we know when climate change is sufficiently serious to warrant government interfering in
the freedom of its citizens to consume?
How can we calculate the external costs of producing and running items such as light bulbs or motor
vehicles? For example, low energy light bulbs consume less energy but they require more energy to
produce, and some brands contain materials that are harmful to the environment such as mercury.
Hybrid cars consume less energy to run but consume more energy to produce.
What are the problems in knowing whether climate change is produced by human activity?
Homework: Find a current event article related to Market Failure