This is a 20-minute video on market failure, prepared for use in high school economics classes to illustrate recent research from the Department of Agricultural Economics at Purdue University. The project is sponsored by the Indiana Council for Economic Education. This and other mini-lessons are also available at the project’s website, agecon.purdue.edu/minilessons. Details on the project is now available at sites.tufts.edu/willmasters.
The video illustrates how economics research can measure market failure, through the example of consumers’ lack of quality information about infant foods in West Africa. In the Indiana high school economics curriculum, this corresponds to standard 4, indicator E.4.2.
The lesson describes a particularly dramatic case of asymmetric information, a type of market failure first described by George Akerlof, for which he won the 2001 Nobel Prize in economics. This type of market failure occurs all around us every day, causing breakdowns in the market mechanism, but is very difficult to detect or measure. In extreme situations, buyers might not believe anything sellers tell them, so won’t buy at any price and there is no market at all. In the markets we actually see, sellers have incurred some cost to gain consumers’ trust, through advertising and packaging or simply setting high prices to signal high quality. If there were a cheaper way to help buyers and sellers trust each other, the quantities sold would be much larger.
A key conclusion from this lesson is that the development of appropriate regulations and quality assurance institutions has been a key part of the growth of our economy, and should not be taken for granted: when buyers don’t trust sellers, markets don’t work – and in very poor countries, such market failures can be deadly. Uncovering market failures is an important part of what economists do. The particular market failure described in this mini-lesson was analyzed using a market experiment in Mali, whose results were published in journal articles in the American Journal of Agricultural Economics and Food Policy, and attracted press coverage in the Chronicle of Higher Education.
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