Market Failure
A market failure occurs when a market fails to allocate resources efficiently. A market allocates its resources in the following ways:
Social Efficiency: where external costs and benefits are accounted for
Allocative Efficiency: where society produces goods and services at minimum cost that are wanted by consumers.
Technical Efficiency is the production of goods and services using the minimum amount of resources.
Productive efficiency: Production of goods and services at the lowest factor cost.
Market Failure occurs when
-knowledge is not perfect,
-goods are differentiated,
-resource immobility,
-Market power,
-services and goods are provided in sufficient quantity by the market
-existence of external costs and benefits
-inequality exists.
Inadequate Knowledge
-Consumers do not have adequate technical knowledge
-advertising can mislead/misinform
-consumers unaware of all opportunities
-producers cannot accurately measure productivity
-decisions based on past experiences rather than future knowledge
Goods/Services that are differentiated
-Branding
-Designer Labels
-Technology-lack of understanding of impact
-labeling and product information
Resource Immobility
-Factors that are not fully mobile
-Labour immobility-geographical and occupational
-Capital immobility-
-Land (transport) - cannot be moved to where it is needed
Market Power
-Existence of monopolies and oligopolies
-Collusion
-Price Fixing
-Abnormal profits
-Rigging of markets
-Barriers to entry
Inadequate provision
Merit goods and public goods
-Could be provided by the market but consumers may not be able to afford or feel the need to purchase-market would not provide them in the quantities society needs.
E.g. sports facilities/ universities.
Public goods
-Goods and services that markets would not be able to provide at all.
E.g. headlamps on highways/street signs.
Non-excludability
Person paying for benefit cannot prevent anyone from also benefiting.
Non-rivalry
Large external benefits in relation to the cost -socially desirable but not profitable to supply.
De-merit goods
-Goods which society over-produces
-Goods and services provided by the market which are not in our best interests.
E.g. Alcohol
External costs and benefits
Cost of economic decision to a third party
Benefits to a third party as a result of a decision made by another party. E.g. education, public transport etc.
Decision-makers do not take into account the cost imposed on society and others as a result of their decision.
E.g. pollution
Market Failure:
-Poverty-absolute and relative
-Distribution of factor ownership
-Distribution of income
-Wealth distribution
-Discrimination
-Housing
Measures to correct market failure:
-State provision
-Extension of property rights
-Taxations
-Subsidies
-Regulations
-Prohibition
-Positive discrimination
-Redistribution of income
Credits:
http://www.bized.co.uk/
Lavinia:)
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