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Unit 3

Karl Marx

and

Market Failure

Lesson 2Krugman, Module 74 pp. 723-726;

Module 76 pp. 743-750; Module 77

pp.754-756; Module 78 pp. 761-770;

Module 79 pp. 782-785

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ADAM SMITH

Greed is Good.-The Wealth of Nations

1776

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The Circular

Flow

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Wealth is Utility, not the accumulation of

Money or Material Goods. The world praises the

individual who makes the most people Happy. -Das Kapital

1867

Karl Marx

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ASYMETRIC

INFOMONOPOLY

BUSINESS

CYCLES

INEQUITY

Marx’s Market Failures

PUBLIC

GOODS

EXTERNALITIES

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Marx’s Market Failures

ASYMETRICINFORMATION

A situation where access to

information in a transaction

is better for one person than

another.

Asymmetric information

turns win/win trades into

win/lose trades.

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Marx’s Market Failures

PUBLICGOODS

A commodity or service

without profit that

benefits all members of a

society, but which would

not be provided by a

private individual or

organization

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Marx’s Market Failures

EXTERNALITIES An externality or spillover is an

impact on a party that is not

directly involved in a market

production or transaction.

In such a case, prices do not

reflect the full costs or benefits

in production or consumption of

a product or service.

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Marx’s Market Failures

MONOPOLYExists when an business has

sufficient control over a particular

market to determine the terms on

which other individuals shall have

access to it’s product.

A market in which the seller

determines the price and quantity

rather than the consumer.

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Marx’s Market Failures

INEQUITYeconomic disparity in income

and wealth between people

or groups of people resulting

from lack of equal treatment,

unequal opportunity and

causing inefficient market

outcomes

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Luxury Goods

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Necessities

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Marx’s Market Failures

BUSINESSCYCLES

Fluctuations in the level

of economic activity as

measured by the general

levels of unemployment

and inflation

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Marx’s Theory of the Business Cycle

LEVEL O

F R

EAL O

UTPU

TLEVEL O

F R

EAL O

UTPU

TLEVEL O

F R

EAL O

UTPU

TLEVEL O

F R

EAL O

UTPU

T

TIMETIMETIMETIME

PEAKPEAKPEAKPEAK

PEAKPEAKPEAKPEAK

PEAKPEAKPEAKPEAK

TROUGHTROUGHTROUGHTROUGH

TROUGHTROUGHTROUGHTROUGH

� Twin Problems of the Business Cycle

• Unemployment

• Inflation

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Business Cycles

•SEASONAL CYCLES

•36 MONTH CYCLES

•10 YEAR CYCLES

•50 YEAR CYCLES

•STRUCTURAL

•CHANGES IN

•TECHNOLOGY

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Some Economists believe Technological

Cycles have become shorter.

Some Economists believe Technological

Cycles have become shorter.

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BUSINESS

CYCLESIMPERFECT

COMPETITION

PUBLIC

GOODS

ASYMMETRICINFORMATION

Marx’s Market Failures

INEQUITY

EXTERNALITIES

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Marx’s Solutions

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government

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UNIT SUMMARY

• The circular flow describes the transactions in any

economy.

• The circular flow shows both the real flow of products

and resources, and the money flow of income, expenditures, revenue and costs.

• Marx described six flaws of the free market: asymmetric

information, external costs, public goods, income

inequity, imperfect competition, and business cycles.

• Each of Marx’s market flaws means that the market has

not achieved Socially Optimal Equilibrium.

• Marx’s solution is government intervention.