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Lecture 10

ECN 340 Lecture 10: Economics of failure

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ECN 340
Thomas Barbeiro

Economic value of failure Failure arises because of: 1. Basic human condition of scarcity 2. Human search for greater rewards 3. Lack of information, particularly in the market system Failures of Scarcity Choices have to be made, some of which will not work out Some produces will not be able to get the necessary resources they need Others already in production will fail to retain the resources they do have Choices and the necessity of allocation make failure unavoidable Pervasiveness of scarcity ensure failures But failures cause: 1. A release of resources that can be reemployed (possibly at lower prices) in more successful undertakings 2. A decrease of abundant GS produced that ca be sold at higher prices As some businesses fail, others will start and grow Searching for greater rewards Even efficient firms should fold if more efficient firms exist No such thing as good absolute performance Relative performance matters A beautiful female can fail to attract a male if there is a more beautiful female Information Failures Information is costly both in the product an resource (land, labour and capital) market Firms cant always tell what products will sell. Resource owners (including labour) cant always correctly guess what sectors will be lucrative in the future Public policy may try to redistribute successes and failures through the tax system (or subsidies) Centralizing decision making process will not solve the information problem Central planning impose superhuman demand on limited capacity of planners to handle information Risk, Uncertainty and rational failures Information deficiencies= problem of risk and uncertainty about future economic events Risk= Probability distribution Example 7 out of 10 restaurants will fail Uncertainty: lack of information makes it impossible to estimate probability of success or failure One can sometimes get a little more information at a cost, but sometimes it cant be had at all Risk and uncertainty will insure some firms, plants and workers will fail
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