Economics Market Failure

Market failure

When resources are not allocated efficiently

Market power

The ability of a firm to raise and maintain price above market value

Causes of market power

Patent, controlling scarce resources, predatory pricing

Policy options to influence market power

1. Competition policy and regulation

2. Market deregulation

3. Legislation

Competition policy and regulation

- Strengthen competition laws

- Empowers Aus copetition & consumer commision to investigate and stop anticompetitive behaviour

- Encourages competition by promoting market entry

Market deregulation

- Deregulate certain sectors to encourage new entrants

- Promotes privatisation (selling government owned businesses to private sectors)

Legislation

- Required to address market concentration

- Required to prevent companies from engaging in anticompetitive behaviour

Externality

An unintended community consequence / side effect that causes a DWL

Policy options to correct externalities

1. Taxes

2. Subsidies

Taxes

- A free that is charged by the government on a product

- Market will respond by ⬆️P and ⬇️Q, DWL is removed

Subsidies

- Cash payments from the government to encourage production of goods / services

- Market responds by ⬇️P and ⬆️Q, DWL is removed