Knowledge in Market failure
Market failure
This occurs when there is an inefficient allocation of resources in a free market. Market failure can occur due to a variety of reasons, such as monopoly (higher prices and less output), negative externalities (over-consumed and costs to third party) and public goods (usually not provided in a free market)Types of market failurePositive externalities – Goods/services which give benefit to a third party, e.g. less congestion from cycling.Negative externalities – Goods/services which impose a cost on a third party, e.g. cancer from passive smoking.Merit goods – People underestimate the benefit of good, e.g. education. It may also have positive externalitiesDemerit goods – People underestimate the costs of a good, e.g. smoking. It may also have negative externalities.Public Goods – Goods which are non-rival and non-excludable – e.g. police, national defence. Public goods are often not provided in a free market.Monopoly Power – when a firm controls the market (with high market share) and can set higher prices.Inequality – unfair distribution of resources in free market, e.g. some experiencing poverty and homelessnessFactor Immobility – E.g. geographical / occupational immobility. For example, when there are pockets of high unemployment, but it is difficult for the unemployed to move and get a job.Agriculture – Agriculture is often subject to market failure – due to volatile prices, fluctuating weather and externalities.Information failure – where there is a lack of information to make an informed choice.Principal-agent problem – Two agents with different objectives and information asymmetries. For example, adverse selection where a buyer has less information than the seller.Moral hazard. When individuals have incentive to change their behaviour when others take the risk. For example, when banks are insured by the government, bankers take risky decisions which can cause bank losses.Macroeconomic instability – When an economy enters into prolonged recession and high unemployment – or inflationary boom which is unstable.Key Terms in Market FailureExternalities: These occur when a third party is affected by the decisions and actions of others.Social benefit: the total benefit to society =Private Marginal Benefit (PMB) + External Marginal Benefit (XMB)Social Cost: is the total cost to society =Private Marginal Cost (PMC) + External Marginal Cost (XMCSocial Efficiency: This occurs when resources are utilised in the most efficient way. This will occur at an output where social marginal cost (SMC) = Social Marginal Benefit. (SMB)
Valli Nachiappan
Market Failure - economics , ca inter
These notes are about MARKET FAILURE - ca inter Four major reasons for Market Failure 1. Market Power 2. Externalities 3. Public Goods 4. Incomplete Information
Abhishek kumar