Economics - outcome 3

Economics Assessment – outcome 3
1. Market failure is ultimately defined by when a market is unable to allocate the resources it has effectively. The two main reasons that a market fails is down to productive inefficiency and allocative inefficiency. Productive inefficiency can be described as when companies are not making the most of the inputs they receive. The output that has been lost due to this could have been used more wisely to satisfy consumer wants and needs. Allocative inefficiency is when resources are not allocated correctly and could have been to better use elsewhere which would satisfy more wants and needs. However there are other reasons why the market can fail on a more common level, these being things like external factors, for example pollution. Imperfection markets are likely to fail also as markets are unable to make profits from producing public and demerit goods, this can therefore often result in market dominance. Factors which must be met in order for a market to run are that the producers must be compliant with the changes in demand and be able to respond to these changes. Additionally, the cost to make product or services and the price of these must reflect the social costs and benefits. These factors of production must run efficiently. Public goods are goods which are non-rival and non-excludable which means that the amount of the good consumed by one person does not exclude the amount another person is entitled to and can consume. Furthermore, it also means that once the good is made available, it is impossible to stop others use of it, for example, street lighting. Subsequently, these goods will never be provided by markets as the companies who are seeking to make a profit and would not invest as they cannot collect the revenue needed to supply these public goods. Consequently, there is allocative inefficiency as markets are incapable of attracting supply to necessary services, like policing. Merit goods are goods and services