4.1.8.6 Market Imperfections

What’s the provision of information?

• ensures that economic units can maximise decisions when consuming and producing goods and services

• The government will provide information where the private sector fails to do so.

Where does the government provide information?

• The job market

• Dangerous products e.g. cigarettes

• Economic data to help firms plan for the future.

• The greater the information available to consumers the more likely they are to buy goods and services with confidence.

What is information failure?

• type of market failure where consumers or producers:

• have asymmetric information

What is symmetric information?

• when all the relevant information is known by both parties.

What is information asymmetry?

• occurs when some parties in a transaction have more information regarding the product than others.

How is a monopoly an example of market failure?

• A monopoly occurs when there is only one producer in an industry

• This provides the monopolist with market power leading to higher prices and abnormal profits

• There will be allocative inefficiency and a misallocation of resources

What is factor immobility and when does it occur?

• when a factor of production cannot move easily from one sector of an economy to another.

• occurs because it is difficult for factors of production to be put to alternative uses.

• can result in a misallocation of resources.

• leads to market failure Factor immobility can occur for: Labour, Capital, Land

What can cause labour immobility?

• Geographical immobility – where workers in an economy find itdifficult to move from one region to another

• This may occur due to:

• The cost of moving e.g. housing costs in London

• Imperfect information e.g. not being aware of jobs

• Not wanting to move away from family and friends

• Occupational immobility - workers are not equipped for different types of work e.g. a coal miner cannot easily transfer to become an accountant.

How can labour immobility lead to structural unemployment?

• result of the decline of a particular industry creating large scale unemployment in a geographical area

How can Capital immobility occur?

• Rapid technological change- changing technology can make machinery obsolete —> this leads to costs for the firm as they update capital equipment

• Structural change in the economy -as the types of industry that make up the economy change so does the type of capital equipment needed

• less likely to use specialist coal mining equipment nowadays and it is difficult to put this equipment to use elsewhere

How can land immobility occur?

• The inability to change the use of land due to —> Climate conditions where it is not possible to produce certain crops e.g. the UK finds it difficult to produce grapes

• It is almost impossible or not economically practical to move land from one area to another

• The EU subsidises the growing of certain foodstuff so farmers and fishermen continue to produce these

What can factor immobility lead to?

• lead to a misallocation of resources and therefore market failure

• If factors of production are immobile then markets will find it difficult to clear when there is a change in supply and demand

• If demand increases but supply is fixed due to immobile factors then there will be distortions in the market and it will take time for market equilibrium to be reached

What is perfect knowledge?

• occurs when all consumers in a market are fully aware of price, quantity available and other relevant information for all products when making buying decisions.