failure refers to a condition whereby a free market falls short to efficiently
allocate resources leading to unattractive outcome. Market failure narrowly
covers externalities that entail public goods, but it majorly includes
anti-competitive performances. The key examples of market failure are
externalities, insufficient public goods, and market power. Market power takes
place when economic actors are in a position to exert influence on prices in
the market and the amount of goods sold resulting in imperfect competition (Econlib.org, 2015). Market failure is not just as a
result of an increase or decrease in the cost of the commodity, but it may take
place when a firm does not take into consideration all expenses of production
or when the produced goods can be consumed by everyone at a free cost. The
various categories that exist in a free market include the following;
externalities both negative and positive, imperfect competition and public
of Market Failure
externalities are when the social expenses are more than private expenses paid
by producers. A good example of negative externalities is pollution from
cigarettes. Negative externalities can be solved through the use of
regulations. For the case of cigarettes, they have a negative impact on the
health of individuals. As a result, the government should the maximum quantity
to be produced making the supply curve to shift upwards to attain maximum quantity.
Negative externalities can also be solved through the use of indirect taxes.
Indirect taxes refer to taxes levied on expenditure of goods, security,
tobacco, law and order among others.
is another reason for market failure. Monopolies produce commodities in small
quantities and sell them at increased prices to a level that the market cannot
afford. This results in a surplus in the market because individuals cannot
afford to buy the goods. Examples of monopolies are PUAS, TNB, and Bhd who are
the key providers of electricity.
There are various
examples of externalities globally and they include the following;
In a society where
there is no properly defined right of environment, one can easily pollute air
or water. This is because these polluters do not have any personal expense from
the pollution they cause, but the whole community suffers because of pollution.
The difference between a private and social cost makes most of the individuals
to select the socially undesired act devastating the economic efficiency of a
market economy. A similar example is applicable to beekeepers. There is no
proper benefit of a bee fly, and an s a result the social benefit of a
beekeeper is more than the private benefit.
cause of market failure is common property resources. The government charges a
zero price on all common properties. Common properties refer to those
properties whose access is not controlled and they do not have a specific
public good refer to facilities or properties that can be used by several
consumers directly without reducing the rate of consumption to any individual.
Therefore, a public good is non-excludable and non-rival. A consumer cannot be
denied the opportunity to consume a good even if he has not paid for it (Econlib.org, 2015). A good example of a public good is
a light house whereby every person enjoys. The fact that one person may take an
advantage of light house; another person may not take a similar advantage because
the government may fail to produce that type of a commodity because of
externalities and anti-competitive behavior occur because of failures in the
protection of property rights. However, failures in income distribution happen
when the market fails to achieve a socially optimal allocation (Economicshelp.org, 2015). This can happen even where
effective protections of property rights exist. Where the market fails to
eliminate this inconsistency, it is reasonable to conclude that some people
earn unjustifiably low income, which implies that their property rights are not
safeguarded. How property failure is defined is differs from one scholar to
another, nonetheless, the property rights as a concept incorporates the needs
of people, while the property right in a narrow sense relates only to a
person`s ability and performance to earn some form of income.
crucial source of anti-competitive behaviors is the main position of one agent
or various agents in the market. The leading player enjoys a better bargaining
power to improve. Because all transactions take place on regular basis, the
outcome is that transfers of income and property may not be challenged
irrespective of how abnormal the related income may be. The negotiating power
of an agent is to show the value of the agents’ ability to satisfy the desires
of others. A good example of competition failures is a monopolist who produces
high quality products at a reduced cost than others such that his price makes
him to be popular. In such a case, a monopoly may be considered a prize awarded
because he will be the winner for competition in his respective sector.
Econlib.org. (2015). Market Failures, Public Goods, and Externalities, College Economics Topics | Library of Economics and Liberty. Retrieved 13 April 2015, from http://www.econlib.org/library/Topics/College/marketfailures.html
Economicshelp.org. (2015). Market Failure |
Economics Help. Retrieved 13 April 2015, from
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