Production, living standards and market failure Today, the average person lives better than they did fifty years ago. Two reasons are given for this. The first is capital accumulation, the idea that if people save more, production increases. Secondly, we are better at managing resources; we have learned to get more outputs from given inputs. Table 1.1 shows the changes in GDP by continent. Table 1.1: Average annual real GDP growth rates (%) by continent | | 1962-71 | 1972-81 | 1982-91 | 1992-2001 | 2002-11 | Average annual rate (1962-2014) | |---|---|---|---|---|---|---| | Africa | 4.5 | 3.6 | 2.6 | 3.1 | 5.5 | 3.9 | | Americas | 4.8 | 3.9 | 2.5 | 3.4 | 2.3 | 3.3 | | Asia Pacific | 7.9 | 4.9 | 5.1 | 4.9 | 6.3 | 5.8 | | Europe | 5.1 | 2.8 | 2.4 | 1.4 | 2.2 | 2.7 | Education and learning have played a central role in these increases in GDP. However, there have been fundamental changes in the labour market. It used to be that people often had the same job for years. Now job turnover is high and employers are less willing to invest in formal education. There needs to be systematic intervention by the government. Markets alone will not do a good job of creating a learning society. It was government support that enabled the decoding of the human genome. But a US company realised that if it could patent a test for a certain gene, it could profit. It succeeded in getting patents for a test on two breast cancer genes. It exercised its monopoly power. When Yale University discovered a better test for the genes the company said they could not use it. But the company's tests were inferior and people suffered through misdiagnosis. Private returns have nothing to do with social returns. The values that have allowed western capitalism to thrive – individualism, competition, consumption – now threaten its future. Values that were considered less important need now to be cultivated to promote social efficiency: sustainability, community, co-operation and reflection. In the market, this can only be achieved by government intervention to adjust economic disincentives and incentives to take account of external costs and benefits. The lessons of the prisoners' dilemma might be relevant. Economic disincentives include taxes on carbon emissions to limit negative externalities. Economic incentives that include subsidies and pollution permits can be used to encourage the development of sustainable technologies and practices. Source: RSA Journal, Issue 3, 2014

1. (a)The article says that an increase in saving would increase production. Would an economist necessarily agree with this statement?[5]
2. (b)Explain what is meant by market failure and consider whether there are examples of market failure in the article.[5]
3. (c)Suggest why the article says that the lessons of the prisoners' dilemma might be relevant.[4]
4. (d)Discuss, with the help of the information, whether the article is correct in asserting that the 'average person lives better than they did fifty years ago'.[6]