Why Markets Fail: The Economics of Covid-19
This module introduces the concepts of economic efficiency and market failure, and uses them to analyze economic policy responses to the Covid-19 pandemic.
Lecture: Welcome Video
This module introduces the concepts of economic efficiency and market failure, and uses them to analyze economic policy responses to the Covid-19 pandmeic. The economics discipline analyzes the allocation of resources and in particular the role of markets as a mechanism to allocate resources. It views the role of government as helping markets to work better when markets fail to achieve efficiency outcomes on their own.
The module begins with an overview of market failures – conditions under which the market is not efficient. It also uses examples to describe both government and private sector responses to market failures.
The larger, second part of the module considers the market failures associated with the Covid-19 pandemic. The module describes the reasons that individual firms and consumers don’t make efficient choices and the potential role of the government in imposing mandates and shutdown, subsidizing testing and treatment, and stimulating innovation.
By the end of this module, you should be able to better answer the following questions:
- What is economic efficiency?
- When is the market mechanism efficient?
- Market failures occur when assumptions of the market model don’t hold. What are the main market failures economists have identified?
- Information is one market failure. How are private mechanisms for correcting this market failure? What are government mechanisms?
- How do governments respond to externalities? Specifically, what does the government do with Covid-19 related externalities?
- What are public goods? Why is innovation a public good?
- What are important economic costs of the Covid-19 pandemic? What costs aren’t included in GDP?
- What is the logic for social insurance during recessions and pandemics? Why don’t private markets provide such insurance?
- What is the logic for government funding of innovation for Covid-19 vaccines and treatment? Why don’t private markets provide adequate investment?
Session 1- This session focuses on economic efficiency, the efficiency of the market mechanism, and mainly, on market failures. Market failures that are emphasized are market power, externalities, asymmetric information, public goods, market frictions and uncertainty. The video briefly defines each, using examples from all sectors of the economy. The video also discusses private mechanisms for mitigating the efficiencies, as well as government mechanisms.
- Lecture: Markets and Market Failures
- Slides: Markets and Market Failures
- Reading: John Quiggen, “Economics in Two Lessons: Why Markets Work So Well, and Why They Can Fail So Badly,” Princeton University Press (For a more thorough, less technical discussion of market failures)
In pairs or small groups, each participant should identify a government economic policy, broadly defined, that impacts firms and consumers and that you are an advocate for. In turn, each participant should advocated for the policy in a 2-3 minute discussion. Then the discussion should turn to what market failures, if any, are relevant. Everyone in the group should contribute. A list of market failures will be helpful. Are there reasons you advocate for the policy that aren’t market failures? If so, then what are they?
Session 2- This session focuses on economic costs of Covid-19 and on the specific market failures which justify government intervention, including economic shutdowns, mandates on individual behavior, testing, travel restrictions, and subsidies for vaccine development and treatment. The market failures that are emphasized are externalities, asymmetric information, public goods, market frictions and uncertainty. The videos also discuss government mechanisms for mitigating the inefficiencies, and the complexities of evaluating the impact of these policies on economic costs of the Covid pandemic. The session then discusses the SIR model (an epidemiological model) as an important tool for evaluating government interventions.
- Lecture: The Economics Cost of Covid-19
- Reading: Joshua Gans, “Economics in the Age of COVID-19 (MIT Press First Reads),”MIT Press (A good general reading on the economics of the covid pandemic)
- Slides:The Economics Cost of Covid-19
- Lecture: The Market Failures
- Slides: The Market Failures
- Lecture: The SIR Model
- Slides: The SIR Model
In pairs or small groups, each participant should identify a specific government COVID-19 policy that impacts individuals that you think should be strengthened. In turn each participant should advocated for the policy in a 2-3 minute discussion. Then the discussion should turn to which market failures are relevant. Be specific about why private individuals and firms are not making efficient choices. Everyone in the group should contribute. A list of market failures will be helpful. Are there reasons you advocate for the policy that aren’t market failures? If so, then what are they?
Write an short 700-1000 word op-ed arguing for a specific government policy that you think will decrease the economic costs of the Covid-19 pandemic and make society as a whole better off (domestic or international).
Describe both the benefits (cost reductions) and costs (cost increases) associated with your policy proposal. And describe why you do not think a decentralized market solution would do better. Be specific about the market failure or failures.
The goal of this assignment is to give the writer the opportunity to apply the concepts of economic efficiency and market failure, while at the same time being persuasive. It will be evaluated based on the application of concepts, how persuasive it is, and whether or not the arguments provided were effective.
Possible follow up: have students read each other’s op-eds once they’re finished. Each student should pick out one argument that they think is strong (and explain why) and one argument or part of the paper they think needs more work (and explain why). Students should have the opportunity to revise the paper in light of this feedback.