Examples of economic problems

Tejvan Pettinger December 11, 2015 economics

The fundamental economic problem is the issue of scarcity but
unlimited wants. Therefore, an underlying features of economics
is concerned with dealing how to allocate resources in society to
make the most efficient and fair use of resources.
Therefore economic is concerned with:

What to produce?
How to produce?
For whom to produce?

Scarcity implies there is only a limited quantity of resources, e.g.

finite fossil fuels and a limited quantity of manufactured goods.
Because of scarcity, there is a constant opportunity cost if you
use resources to consume one good, you cannot consume
another.
Micro economic problems
1. Externalities
The economic problem of pollution
One of the most frequent problems is that economic decisions
can have external effects on other people not involved in
transaction. For example, if you produce power from coal, the
pollution affects people all over the world (acid rain, global
warming). One reason this is a particular problem is that we
cannot rely on the free market to provide the most efficient
outcome. If we create negative externalities, we dont take them
into account when deciding how much to consume. This is why
we can get overconsumption of driving a car into a city centre at
peak hour. If everyone maximises their utility, it doesnt lead to the
most efficient outcome but gridlock and wasted resources.
Externalities, usually need some kind of government intervention.
For example, taxes on negative externalities(e.g. sugar tax) or
subsidies on positive externalities (e.g. free public education)
But, even the solution to market failure (e.g. taxes, creates its own
potential problems, such as how much to tax? will there be tax
evasion?)

Monopoly
Monopoly was an economic problem that Adam Smith was
concerned about in his influential book of economics A Wealth of
Nations. For various reasons firms can gain monopoly power
and therefore the ability to set high prices to consumers. Given a
lack of alternatives, monopolies can make high profits at the
expense of consumers, causing inequality within society.
Monopoly power can also be seen through monopsony
employers who pay lower wages to their workers.
How to deal with the problem of monopoly? A government may
seek to encourage competition, e.g. rail franchising, or price
regulation to prevent excessive prices.
Inequality / poverty
Inequality is considered a problem because of normative opinions
such as it is an unfair distribution of resources. Also, you could
argue there is a diminishing marginal utility of wealth. If all wealth
is owned by a small percentage of the population, this reduces
net welfare. Redistributing the money to the very poor, would
enable greater net utility to society.
Inequality is a problem. However, it is also a problem to know how
much we should seek to reduce poverty. Many will agree of the
necessity of reducing absolute poverty but how far should we
take it? Should we aim for perfect equality (Communism) or
should we aim for equality of opportunity?
Another issue with reducing poverty is that measures to reduce
poverty may cause unintended consequences e.g. higher
income tax on high earners, may create disincentives to work.
Giving benefits to the low paid may reduce incentives to work.
Volatile prices
Some agricultural markets can have volatile prices. A glut in
supply can be bad news because the fall in price can lead to
lower revenue for farmers. It could even cause some to go out of
business because of a bad year. These volatile markets can
cause swings in economic fortunes.
Irrational moods
In some asset markets we have seen volatile prices exacerbated
by irrational exuberance. Consumers have been caught up in a
market frenzy. Hoping that rising prices will make them richer
and expecting prices to keep rising. We can see this in issues
such as tulip mania, the South Sea Bubble, railway mania, and
the recent property bubbles.
Macro economic problems
Unemployment 1933
Unemployment has been a major economic problem in advanced
economies. One of the principle causes of unemployment is
swings in the business cycle. A fall in demand for goods during a
recession, causes people to be laid off. Because of the depressed
state of the economy, there is an imbalance between demand and
supply of workers.
Unemployment can also be caused by rapid changes in labour
markets, for examples, unskilled workers unable to gain
employment in a high tech economy. Unemployment is a problem
because it is a waste of resources, but more importantly it leads
the unemployment in dire economic and personal problems.
Recession
Recession is a period of negative economic growth a decline in
the size of the economy. It exacerbates problems of inequality
and unemployment.
Inflation
High inflation can be a serious problem, if prices rise faster than
wages and nominal interest rates. In periods of rapidly rising
prices, people with savings will see a decline in their real wealth.
If prices rise faster than wages, then peoples spending power will
decline. Also, rapidly rising prices creates confusion and
uncertainty and can cause firms to cut back on investment and
spending. Countries which have experienced hyperinflation, have
seen it as a very traumatic period because all the economic
certainty is washed away, leaving people without any certainty.
Balance of payments / current account deficit
A current account deficit on the balance of payments means an
economy is importing more goods and services than it is
exporting. To finance this current account deficit, they need a
surplus on the financial / capital account. For many modern
economies a small current account deficit is not a problem.
However, some developing economies have experienced a
balance of payments crisis where the large deficit has to be
financed by borrowing and this situation usually leads to a rapid
devaluation in the currency. But, this devaluation increases price
of imports, reduces living standards and causes inflation.
Exchange rate volatility
In some cases, the exchange rate can cause economic problems.
For example, countries in the Euro were not able to change the
value of their currency against other Eurozone members.
Because countries like Greece and Portugal had higher inflation
rates, they became uncompetitive. Exports fell, and they
developed a large current account deficit. The overvalued
exchange rate caused a fall in economic growth.
On the other hand a rapid devaluation can cause different
problems. For example, when the price of oil fell, oil exporting
countries saw a decline in export revenues, leading to a fall in the
value of the currency. A rapid devaluation causes price of imports
to rise and causes both higher inflation and lower growth. A
difficult problem for policy makers to deal with.
Development economics
Developing economies face similar economic problems, but any
issue is often magnified by low GDP and high levels of poverty.
For example, unemployment in a developing economy is more
serious because there is unlikely to be any government insurance
to give a minimum standard of living.
Poverty cycle. Some developing economies may be stuck in a
poverty cycle. Low growth, and low saving ratios, lead to low
levels of investment and therefore low economic growth. This low
growth and poverty causes the low savings and investment to be
continued.
TVL AVE. RANK
Tacadena, Jomalyn Regatcho 93.25 1
Celeste, Nathalie Ruth Carolino 92.13 2
Torino, Nova Tabiando 91.88 3
Valdez, Ivonah Sarama 91.50 4
Villamor, Allysa Mae Casulla 90.63 5
Casiquin, Kim Bryan Bolagao 89.88 6
Borromeo, Hazel Joy Aruta 89.25 7
Caido, Joel Candelario 88.50 8.5
Ferrer, Mark Christian Bauzon 88.50 8.5
Corpuz, Jocel Rose Nisperos 88.50 8.5
Pasculado, Josephine Paredes 88.50 8.5
Caido, Jenny Cenalada 87.63 12
Narvas, Jobelyn Delos Santos 87.00 13
Torino, Reynalyn Castillo 85.50 14
Siena, Ruby Casulla 85.38 15
Tacadena, Camille Barbosa 85.38 16
Siena, Ralph Gerald Agodilla 84.75 17
Collado, Dianne G 84.63 18.5
Laguisma, Julie Ann Torino 84.63 18.5
Siena, Vivian Casulla 84.00 20
Casiquin, Mailyn Caneda 83.50 21
Carolino, Mar Joseph Sabacahan 83.38 22
Casulla, Reymart Espejo 83.25 23
Agodilla, Dianna Rose Siena 83.00 24
Caido, Renzel Caballero 82.00 25
Aceveda, Marnel Fuentes 81.63 26
Agodilla, Ace Clavo 80.88 27
Dela Cruz, Kenneth Casulla 80.75 28.5
Tacadena Jr., Ronald Degala 80.75 28.5
Agodilla, Allan Aro 80.50 30
Casulla, Joris Mendoza 79.50 31