1. The problem of externalities

Environmental issues

Economics is traditionally concerned with utility maximisation – allowing individuals to aim at increasing their economic welfare. However, this can ignore long-term considerations of environmental sustainability. If we have over-consumption in this century, it could cause serious problems for future generations – e.g. global warming, loss of non-renewable resources. The difficulty is that the price mechanism doesn’t take into account these future costs, and policies to reduce consumption may prove politically unpopular.

– How to deal with potential future environmental costs?

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.