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Unit 2.12: The market’s inability to achieve equity (HL only)

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  • Units 1-2: Microeconomics/
  • Unit 2.12: The market’s inability to achieve equity (HL only)

Introduction

This is the last of the Market Failure units and considers the strengths and weaknesses of both market based and interventionist approaches to development / economic growth.  The page considers whether or not a market based economic system is moral but also whether it is capable of provide equity to all of its members.

Enquiry question

Is the market able to achieve equity?

Is capitalism moral?

Lesson time: 70 minutes

Lesson objectives:

Understand whether a free market economy may result in an unequal distribution of income, wealth and opportunity.

Recognise that high rates of economic growth does not always bring benefits to a nation.

Teacher notes:

1. Beginning activity - begin with the first two video activities and then discuss this as a class.  (Allow 25 minutes in total)

2. Link to TOK - is capitalism moral?  (20 minutes)

3. Developing theory - activity 4 involves short responses based on a video of the negative externalities caused by unregulated growth in China. (25 minutes)

Activity 1: The free market

The following two videos paint a very different picture of free market capitalism.  Watch both and then discuss which of the two arguments you find most convincing.

Video 2

Activity 2: The importance of strong institutions to help regulate free market excess

The following video highlights the importance of strong institutions in regulating the excesses of the free market and promoting development.  After watching the video highlight the institutions required to help a nation develop.

Successful institutions include some run by private enterprise, e.g. private businesses generating wealth as well as public services required to work along side those e.g. health, education and infrastructure.

Activity 3: Theory of knowledge: Is capitalism moral

Watch the following videos and then decide:

Video 1

Video 2

Activity 4: Negative externalities of unrestrained economic growth - a focus on China

The following video focuses on some of the negative externalities of unrestrained economic growth in China.  After the following video answer the questions that follow:

(a) Explain why the high rates of air and water pollution in many Chinese cities represent a negative externality to unregulated free market growth.

Free from government intervention business and consumers will only consider their private costs and benefits when making any production / consumption decision and so the MPB for demerit goods (such as pollution) will normally exceed MSB.

(b) Illustrate the negative externality on a suitable diagram, showing the size of the welfare loss.

Free from government intervention the MPC of production ≠ MSB.  As the diagram illustrates the production of certain harmful good and services is greater than the socially optimum level of Qso.

(c) How does the video highlight the merits of the argument that the most effective method of improving living standards in an economy is through a mixture of free market and government interventionist methods.

In an unregulated free market economic development and possibly even growth is likely to be hindered by the over production of demerit goods.  The private sector / free market also relies on the the public sector to fund human and physical capital projects which it needs to produce the goods and services that the economy needs.

The activities are available as a worksheet at:  Activities