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Chapter 8

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Ryerson University
ECN 340
Thomas Barbiero

The Economics of Human Behaviour: Chapter 8  The Economic Value of Failure o Failure arises because of:  Basic human condition of scarcity  Human search for greater rewards  The market system  Failures of Scarcity o Choices have to be made, some of which will not work out o Some producers will not be able to get the necessary resources they need o Others, already in production, will fail to retain the resources they have o Choices, and the necessity of allocation make failure unavoidable o Pervasiveness of scarcity ensures failure o But failures cause:  A release of resources that can be re-employed (possibly at lower prices) in more successful undertaking  An decrease of abundant G & S produced that can then be sold at higher prices (when supply fails)  As some businesses fail, others will start and grow  Searching for Greater Rewards o Even efficient firms should fold if more efficient firms exist o No such thing as absolute performance evaluations  All depends on the benchmark  Relative performance matters (Alternatives)  A beautiful female can fail to attract a particular male if an even more beautiful female competes  Information Failures o Information is costly both in the product and resource market o Firms can’t always tell what products will sell. Resource owners (including labour) can’t always correctly guess what sectors will be lucrative in the future o But information problems may not always be correctible because of scarcity o Public policies may try to “redistribute” successes and failures through the tax system (or subsidies) o Centralizing decision making processes will not solve the information problem o Central planning imposes superhuman demand on limited capacity of planners to handle information  Risk, Uncertainty and Rational Failures o Information deficiencies = problem of risk and uncertainty about future economic events o Risk = probability distribution – example, 7 out of 10 restaurants will fail o Uncertainty: Lack of information makes it impossible to estimate probability of success o One can always get a little more information, at a cost, but sometimes it can’t be had at all. o Risk and uncertainty will INSURE some firms; plants and workers will fail o Preventing failures may be very costly in that the cost of keeping the f
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