...Market Failures by Erik F. Meinhardt This section sets out to define and describe market failures, how government intervention prevents them or minimizes their effects, and the arguments against government intervention. I. Definitions and descriptions Market failure occurs when free markets do not bring about economic efficiency, that is to say when a Pareto sub-optimal allocation of resources exists in a particular economy. Market failures remain one of the best reasons for government intervention within an economy on moral and economic grounds, arguably, in the best interest of the public. The following are detailed descriptions of several market failures in no particular order: A. Public goods—Public goods are goods wherein the consumption of them does not necessarily prevent another person from also consuming it, nor does that consumption make less of the good available for consumption by others. Scholars commonly present breathable air as an example of a public good for virtually everyone has access to consume it and its consumption does not limit the amount available. Public goods pose a problem for the market because by their nature it cannot provide for them. The private sector will not make a profit from a good which everyone can enjoy whether or not they pay for it. The lighthouse example comes to mind: no matter who pays for the construction of a lighthouse on a particular island, every passing ship will benefit from the protection it provides and...
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... Economics Essay – Market Failure 1. Markets fail when they under or over allocate resources of production or consumption, relative to the best interests of society. Market failure occurs due to four main factors: the existence of externalities, asymmetric information, the abuse of monopoly power, and inequalities and wealth and development. The existence of externalities means that the market mechanism does not always work efficiently. Markets run on a mechanism that only takes into account the private benefit and cost for a good. Besides the marginal private cost and marginal private benefit, there are the marginal social cost and marginal social benefit, which are external. As a result, governments must find responses to try to solve these market failures. 2. Externalities are the effects of market activities on other people that are external to the market. They are either positive externalities or negative externalities. When the social benefit of a good equates the social cost, it is known as the social optimum. Goods that have large positive externalities can either be public goods or merit goods. Public goods are non-rivalrous and non-excludable, while private goods, such as a merit good, are rivalrous and excludable. When a good has large positive externalities, the government should support its production. When a good has large negative externalities (demerit good), the government should limit or stop its production and consumption. Markets can fail in regard...
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...Environmental Market Failure Negative Externalities Costs imposed on a 3rd party not involved with the consumption or production of the good (the external cost) Divergence between private and social cost MSC=MPC+MEC The MEC = the negative externality The free market price is less than the optimum price leading to over consumption Welfare loss Q: The market generated quantity (where privates crosses private) Q1: The optimum quantity (where social crosses social) Over consumption of Q-Q1 Unequal Distribution Effects Citizens in poor countries are more likely to be affected by the consequences of global warming that those in rich countries E.g. drought/flooding They are also a lot less likely to have consumed the goods and services which caused the global warming And a loss less able to protect them selves e.g. through insurance policies There are inequities between those who contribute to global warming and those who suffer from it Citizens of developed (polluting) countries pay less for their goods and services than the social costs of their production MSC=MPC+MEC Government Intervention to correct Environmental Market Failure 2 main types: Market based measures Designed to modify the price mechanism using strategies such as taxes and subsidies Government regulation Sometimes referred to as “Command and Control”, designed to create incentives for firms to reduce harmful...
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...Q1. Market failure occurs when resources are not allocated in the most efficient way to achieve highest possible social welfare. In a free market society certain goods and services would not be provided by the private sector as they would not be profitable enough for the companies producing them. As a result, society as a whole would suffer. The government steps in to provide the goods and services required by society that private firms will not provide. These public goods include street lighting, emergency services and public spaces eg parks. These services are paid for by the government which collects the funds through taxation. Merit goods are also funded or subsidised by the government. These are goods or services which people would generally not choose to pay for or think to save for which the government thinks are important ie education, libraries, NHS medical treatment. In the UK every child has the right to an education but many households would not be in a position to pay for it. Likewise, before all prescriptions were free in Scotland, there were still some who qualified for free prescription which were funded by the government ie low income households including those in receipt of certain benefits, elderly people of pension age, and children under the age of 16 or 16 and 17 year olds who were still in education. The presence of externalities can contribute to market failure where the actions of a firm leads to a greater social cost ie the presence of lead in car...
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...Invisible hand, Market failure and Government intervention Invisible Hand Invisible Hand, term used in the book “The Wealth of Nations”, by classical economist Adam Smith, to characterize the idea that a guiding force leads individuals seeking their own economic self-interest to act in ways that also benefit society. A vindication of Adam Smith's intuition about the existence of an "invisible hand" bringing consistency and order to the chaos of individual actions - would be remarkable in them. Much of economic theory of the textbook variety is a celebration of the free market system. This celebration has two parts. First, the operation of the price system, in the context of competitive markets, leads to balance between the demand and supply of the different goods and services traded. In other words, flexible prices result in competitive markets clearing. Second, the market-clearing equilibrium - brought about through flexible prices and competitive markets - is a "good thing" in the sense that it is also a point of economic efficiency. In other words competitive outcomes are also efficient ones. The fact that competition leads to efficiency is known as the First Fundamental Theorem of Welfare Economics. The efficient outcome will have been brought about through parsimony in the use of information; the only things that individuals, in making their supply/demand decisions, need to know are the prices of the different commodities. Furthermore, since the efficient outcome...
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...Immobility * Occurs when barriers between markets prevent factors of production moving from one area to another to find employment * Land is completely immobile and certain types of capital, for examples factory buildings, can only be moved with extreme difficulty and cost. * Usually geographical immobility refers to the ease or difficulty of labour moving between different areas of the country, or between countries. Factors for geographical immobility: 1. Financial costs in moving home 2. Cost of selling house and removal expenses 3. Large regional variation in house prices which leads to a shortage of affordable housing. 4. Family and Social Ties 5. Immigration controls and language differences Occupational Immobility * Arises when workers lack the skills to move between different types of employment, and because it would be very expensive and time consuming to train workers to have the necessary skills to switch between certain jobs. * Sometimes training is not available and some workers lack the aptitude of taking on different types of employment. * For example, workers made redundant in the coal mining industry lack the specific skills that are needed in growing industries such as the provision of financial services. * All this leads to unemployment and a waste of scarce resources, and contribute to market failure in factor markets. Information Failure * Information failure occurs when people have inaccurate, incomplete...
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...|Discuss the reasons why asymmetric information can be a source of market failure. Use examples to illustrate your answers. | |By Andrew Sweeting | |November 1998 | |Introduction | |This essay is concerned with the issue of information in microeconomics, particularly where information is a factor in the failure of| |individual markets in an economy. Economic information and its importance in microeconomics is initially discussed, and continues | |with defining asymmetric information, which is a factor that can lead to a market failure. | |In the analysis of asymmetric information in markets, ex ante and ex post asymmetries information are discussed in relation to market| |transactions. Ex ante asymmetric information can be explained through Adverse Selection in relation to quality of goods in the | |product market, and ex post asymmetric information can be explained through Moral Hazard in insurance markets. Strategies to correct | |market failure(s) caused by these information asymmetries is addressed for each example discussed. ...
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...Market Failure It occurs when the forces of market fails to allocate resources efficiently. Some causes of market failure include imperfect competition, external costs, etc. Our focus will be on external cost and how Bangladesh’s textile industry has contributed to market failure. Overview of Bangladesh’s Textile Industry Textile industry is the second largest industry in the world next to agriculture. Bangladesh has emerged, in just under a decade, as the twelfth largest textile manufacturing nation in the world. This industry has been one of the most success stories of Bangladesh over the last two decades. Textile industries are one of the largest and vital industrial sectors of Bangladesh with regard to earning foreign exchange and labor employment, providing 4.5 million jobs of which 80% are women and contributes 13% to GDP. A huge 78 percent of the country’s export earnings come from textiles and apparel, according to the latest figures available. Bangladesh exports its apparel products worth nearly $5 billion per year to the United States, European Union, Canada and other countries of the world. It is the sixth largest apparel supplier to the United States and EU countries. Combined, the textile and apparel sectors consist of 3,600 firms. There is a concentration of manufacturing activity in and around the capital city of Dhaka and a growing garment manufacturing presence in the country’s export processing zones. Environmental hazard arising from textile industry ...
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...Market Failure Through Congestion Market failure occurs when free markets, operating without any government intervention, fail to deliver an efficient allocation of resources. Markets can fail because of · The existence of externalities - eg pollution (negative) or training (positive) causes private and social costs and/or benefits to diverge · Imperfect information means merit goods are under produced while demerit goods over produced · Markets cannot make a profit from producing public goods and quasi-public goods · The concentration of power in markets results in market dominance and abuse of monopoly power · Factor immobility such as the geographical & occupational immobility of labour causes unemployment hence productive inefficiency · Equity (fairness) issues. Markets can generate an ‘unacceptable’ distribution of income and social exclusion where people on low income – the relatively poor - are denied access to essential goods and opportunities considered ‘normal’ by a society eg food, clothing, housing, and education Economists seek to place a monetary value on the spillover effect. How can time savings, loss of life or limb; environmental damage, lost countryside or loss a species be valued? Either or values of what it would take to avert Eg · Congestion time lost x value of time · Accidents statistical value of life or injury · Noise & local air pollution value changes in traffic flow and proximity to property. In an unregulated...
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...environmental problems considered to be an example of market failure? Environmental problems are considered to be an example of market failure because environmental problems not only compound poverty and low standards of living, but the problems of common access resources or weak regulations result in massive negative externalities and a significant threat to sustainability. Market failure is defined as when community surplus is not maximized due to problems preventing resources from being allocated in an optical manner. Negative externalities, also used in this essay, is defined as a decision or a product that leads to it having a larger society cost than private cost. This essay will be split into different parts to tackle this problem: 1) Examples of market failures and environmental problems 2) Explanation of environmental problems as negative externalities 3) Allocative inefficiency and overproduction at free market price due to marginal social cost being larger than marginal private cost There are different ways of market failures. Firstly, the lack of public goods is a market failure. Public goods are goods that would not be provided at all in a fee market. Since they are goods that are of benefit to the society, the lack of public goods in the free market is considered to be a market failure. (…) However, the main focus of this essay would be on the existence of externalities, which is a type of market failure as well as the negative externalities of consumption...
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...Q1 Market failure: In my view: market failure is a market can’t be in accordance with the original efficiency of the distribution of goods and services. For example: The status quo of the market has no way to meet the interests of the people of a situation Merit Goods (Doe. M. 1965) is one: people produce an unreasonable consumption of consumer goods evaluation. For example, cigarettes harmful to people's health, but some people want to buy. Education is important to people, but some people do not put money into it. Government intervention can lead to a decline in merit goods production, some people would rather buy a better car, a better house at some point, and do not want their children to receive better education. However, such as tobacco...
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...lead to market failure. This is because the free market forces generally ignore the external cost. For example, driving a car imposes a private cost to the driver but driving a car also creates a greater social cost for other people (the third party) in society such as; Noise and Air Pollution. Question 2. From Extract D, I have observed that the cost of operating a speed camera per site is approximately about £21093. This is higher than the cost of operating per traffic light camera, for which the cost is about £14693. I have also observed that the annual fine income generated by speed cameras is higher at £6,730,000 than that of the annual fine income generated by traffic light cameras, which is at £1,632,000. Question 3. A merit good is a good or service which generally consist of positive externalities that benefit the greater society in general. These good/services are provided by the state as the market forces fail to provide them at an optimal output. Merit goods are often underprovided because the consumers of these merit goods do not consider the greater social benefit and mostly the private benefit of consuming the good. This means that the positive externalities are not taken into consideration. Therefore the quantity consumed ends up at QP; therefore the marginal private benefit is below the marginal social cost. As the market only produces match the quantity consumed at QP. As a result a welfare lost at ABC is created as the market does not...
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...Topic Two: Market Failure The healthcare system in Britain is predominantly paid for by the Government, and has done now for a number of years, through taxes paid for by the public. In contract the United States, the health care system is part of a free-market economy. This means that when a member of the US public is in need of health care, they must pay for it themselves, with no government help. For example, Sloman (2007) gives a distinct definition to a free market economy, ‘An economy where all economic decisions are taken by individual households and firms with no government intervention’ If healthcare was to be funded completely through a free-market economy, a lot of individuals would say that it would be a relatively fair way of providing each person in need of care, quality treatment. The website Patient UK (2009) cited that ‘1 in 16 hospital admissions are due to alcohol related illnesses’. This strong statistic would reveal that the majority of people in Britain are paying taxes towards the NHS to pay for the care needed for ever-growing amount of people seeking treatment for injuries and illnesses, they most likely would not obtain if they hadn’t got so intoxicated. In some cases, some members of the public in need of the treatment are in fact those of the British public seeking benefits for the Government, so in turn are not only looking for tax payers to for their living benefits but also healthcare. It could be said that the healthier members of the public...
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...Market Failure An Economic Analysis of its Causes and Consequences Vani K. Borooah * Professor of Applied Economics University of Ulster February 2003 * School of Economics and Politics, University of Ulster, Newtownabbey BT37 0QB, Northern Ireland (VK.Borooah@ulst.ac.uk). I am grateful to the Department of Finance and Personnel (Northern Ireland) for supporting this work though, needless to add, I alone am responsible for the contents of this paper and, indeed, for any of its deficiencies. 1. Introduction Much of economic theory of the textbook variety is a celebration of the free market system. This celebration has two parts. First, the operation of the price system, in the context of competitive markets, leads to balance between the demand and supply of the different goods and services traded. In other words, flexible prices result in competitive markets clearing. Second, the market- clearing equilibrium - brought about through flexible prices and competitive markets - is a "good thing" in the sense that it is also a point of economic efficiency1. In other words competitive outcomes are also efficient ones. The fact that competition leads to efficiency is known as the First Fundamental Theorem of Welfare Economics2. These results - which are, of course, a vindication of Adam Smith's intuition about the existence of an "invisible hand" bringing consistency and order to the chaos of individual actions - would be remarkable in themselves. But there is more. The efficient...
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...Situation 1: The motorcycle helmet market has 13 companies, and four firm concentration ratio of 26%. While the helmets have a variety of designs, they are sold at very similar prices. Recently, the death rate from head injuries in motorcycle crashes has been rising. The producers advertise their helmets as “effective,” but some helmets withstand most falls and others are produced with materials that are more likely to crack in commonly experienced falls. The weaker helmets cost about $8 less to produce. There is no simple way for consumers to determine helmet safety. a) This is a case of market failure caused by externalities emanating from some production agents of the helmets producing lower quality hence weaker helmets while still pricing them at the same price level as the safer, higher quality helmets. This causes a high negative production externality as the consumers will eventually lump all helmets as unsafe, which will negatively affect the other companies as the consumers cannot determine easily the safety of the different brands of helmets. Thus, the consumers may opt to forego riding motorcycles altogether. b) Since the producing agents of the weaker helmets are only considering maximizing the profits at the expense of quality and safety, they do not take into consideration the social costs associated with the use of weaker helmets. Initially, the production agents for these weaker helmets will receive high marginal benefits than marginal costs due to...
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