Markets fail for four reasons
1. Abuse of market power – having market power is not a masalah , the masalah is abusing it. It is abused through monopolies and monopsonies , a monopolist is a single provider of a service for example KBS TV in the 70’s while a monopsony is a single consumer. In Kenya when one wants to use software , they buy it from Microsoft so this is a Monopoly. It has been argued that Microsoft has been abusing its Monopoly power. When it got into the market it was giving windows explorer for free so as to kill Netscape Navigator , they killed navigator through bundling ( putting many products together so that to use one you need the other)
2. Asymmetrical information – one party to a transaction has more party than the other party. In IP and computer products , the supplier is likely to have more information than the buyer e.g. the software seller is likely to know more about the software than the buyer. In second-hand markets , this also happens a lot. For example the seller of a second hand car is likely to know more about the car. Need to create property rights to correct this anomaly.
3. Negative Externalities: the opposite of this is the Network Effect: It has been argued that whenever an individual cannot internalise certain costs , they are not going to internalise the cost unless there is a tax or penalty. There will be a budbahasa hazard. In 1980s – 90s WM/IMF there was the argument that education , health service should be cost based , education should not be free because people are not likely to internalise the cost , they will abuse it.
Novels are good places from which one can do character merchandising e.g. Harry Porter – one can merchandise Harry.
Characteristics of “Network Effect” – examples tv programs and novels
Public goods problems:
Non-rivalous products
If the cost of producing an extra unit of a product is limited. Book publishing- Aminata – Prof Imbuga – for Prof to publish Aminata he has to start with Research about the cultural practices. He has to spend time on writing the book
The book has to be edited , printed , Published , Advertised or promoted and distributed to bookshops
The processes are costly and time consuming ,
This work can be destroyed by a counterfeiter who does not need to go through all the processes that the author has gone through. Where the book has a captive market , the counterfeiter does not pay any royalties.. this is the masalah of freeloading.
Freeloading is a masalah because the extra cost of producing of an IP product is costly. Stop free riding be a fair follower. The phenomenon of non-exclusive – if there is a tv agenda showing , it is difficult to exclude others from watching. It is non-rivalous and non-excluding , if you light your cigarette from mine , I don’t lose and you benefit. Theory by Yochai Benkler
Once an article of a public good is created , it is non-rivalous – it is non-exclusive. Because of that once a product is created it becomes much cheaper to reproduce , e.g. publishing Aminata , counterfeiters come to cash in. Problem of IP first copy difficult to produce but you cannot exclude others from enjoying it. There are two approaches to IP