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A market failure is a situation where free markets fail to allocate resources efficiently. According to David Begg et al (2011: pg.315) says ‘In the absence of any distortions, competitive equilibrium is efficient. We use the term market failure to cover all the circumstances in which market equilibrium is inefficient. Distortions then prevent the invisible hand from allocating resources efficiently’. The following are possible causes of market failures. Imperfect Competition, Asymmetry of Information stemming either from ‘hidden information’ or for from ‘hidden action’, Public Goods and Inequality, Externalities
1. Imperfect competition
Only prefect competition makes firms equate marginal cost to price and thus to marginal consumer benefit. Under imperfect completion, providers set a price above the marginal cost. Since consumers equate price to marginal benefit, marginal benefit exceed marginal cost in imperfectly competitive industries. Such industries produce too little compared to the efficient level. Increasing the level of competition an imperfectly competitive market would result in higher output produced. This would add more to consumer benefit than to production cost or the opportunity cost of the resources used. Economists Arrow and Hahn (1971:pg123) regards an outcome as being "efficient" if there no other another outcomes in which, relative to the original outcome, some persons are better off without anyone being worse off. If such "better" outcomes exist, then the original outcome is termed inefficient.
Imperfect market failure can be internalized by imposition of a lump-sum tax on a monopolist and supernormal profits are taken as tax. Governments may also regulate pricing for monopolies. Government may impose regulations to control monopolies, Forbidding the formation of monopolies (e.g., antitrust laws), Forbidding monopolistic behaviour (like predatory pricing),Ensuring standards of provision and Ensuring competition exists (e.g.,
1. Imperfect competition
Only prefect competition makes firms equate marginal cost to price and thus to marginal consumer benefit. Under imperfect completion, providers set a price above the marginal cost. Since consumers equate price to marginal benefit, marginal benefit exceed marginal cost in imperfectly competitive industries. Such industries produce too little compared to the efficient level. Increasing the level of competition an imperfectly competitive market would result in higher output produced. This would add more to consumer benefit than to production cost or the opportunity cost of the resources used. Economists Arrow and Hahn (1971:pg123) regards an outcome as being "efficient" if there no other another outcomes in which, relative to the original outcome, some persons are better off without anyone being worse off. If such "better" outcomes exist, then the original outcome is termed inefficient.
Imperfect market failure can be internalized by imposition of a lump-sum tax on a monopolist and supernormal profits are taken as tax. Governments may also regulate pricing for monopolies. Government may impose regulations to control monopolies, Forbidding the formation of monopolies (e.g., antitrust laws), Forbidding monopolistic behaviour (like predatory pricing),Ensuring standards of provision and Ensuring competition exists (e.g.,
Bibliography: Arrow, K.J. (1971), Social Choice and Individual Values, New York: John Wiley. Begg D et al (2011), Economics, McGraw – Hill Higher Education, Berkshire, London Hall R.E and Lieberman, (2007), Economics: Principles and Application, Times Printers, San Francisco. Weimer, D.L. and Vining, A. (1999), Policy Analysis: Concepts and Practice, Upper Saddle River, NJ: Prentice Hall.