TEACHING NOTES: MARKET FAILURE: NOTES ON TEACHING MICROECONOMICS WITH ISLAMIC PERSPECTIVE

In teaching Principles of Microeconomics, the discussion on market failure is introduced after students have grasped the idea of free market economy. Once students understandthe importance of market in achieving efficiency, they are then presented with the facts onproblems and shortcomings of the market. Chapter title such as ‘Market Failureand Government’ is usually given to the discussion. The discussion, for example, appears in Chapter 5in McConnell, Brue and Flynn(2012)andChapter 6inParkin (2013).Focus of discussion on market failure is usually theroleofgovernment. Learning outcomes of the topic basically require students to have clear understanding of: (i) the characteristics and importance of public goods, (ii) the types of externalities arising from market activities, (iii) roles of government incorrectingnegative externalities,(iv) the Coase theorem, its significance, and the conditions necessary for it to work, and (v) the concept of asymmetric information, moral hazard and adverse selection problems (McConnell, Brue and Flynn, 2012;Parkin, 2013). Given the wide range of topics,instructors who want to bring Islamic perspectives into the discussion may feel overwhelmed bythe diverse issues and at the same time areconstrained by thelimited contact hours. The proposed points related to Islamic perspectives on market failure could be discussed with students in selective manner. The points are not intended to be comprehensive with in-depth details;rather they suffice to equip students withawareness of theIslamic perspective. More specialized coursessuch as the Foundation of Islamic Economics (ECON1710),as taught at the Kulliyyah of Islamic Economics and Management Sciences, International Islamic University Malaysia, should be the best platform for further elaboration. This paper starts with the definition of market failure andissues related to it. The discussion is crucial in putting into perspective the correct economic concepts on the subject,so that the idea of market failure fromthe conventional view is not misrepresented. In Section 3, market and government roles in Islam, with focus on how to minimize the problems arising from market failure are deliberated. Islamic perspective on externalities is discussed in Section 3.1. In Section 3.2, the issue of asymmetric information and its connection to ghararis elaborated. The last section is onconcluding remarks.