Examples of market failure + Correcting or controlling market failure

Market failure

Market failure

A situation in which the market does not allocate resources effectively and therefore does not take all costs, namely external costs, into account. There is also a mismatch between individual needs and supply in the free market.

Examples of market failure

1. Externalities: pollution, waste

2. Demerit (overconsumed) & merit (under-consumed) goods

3. Monopolies: when a supplier dominates a market therefore creating an under-provision of goods

4. Labour training: under provision of skillful workers (maybe as a means to avoid paching)

External costs (stakeholders affected, and possible ways of intervention)

1. Stakeholders affected
- Workers might be worried about health and fear job security if business is shut down
- Consumers may be forced to buy damaging goods if there are no alternatives
- Gov. will be forced to take the issue seriously because of voters and pressure groups

2. Intervention
- Government might impose eco. taxes
- The business might change their processes to adjust to excess waste created if bad publicity persists

Labour training (name stakeholders affected, and possible ways of intervention)

1. Stakeholders affected
- Consumers might get bad customer service if employees are not trained
- Loss of profits if output is produced at an under predicted value (adverse variance)
- Gov. will worry about the international competitiveness of the industry if skillful employees are not employed

2. Intervention
- Public services/organizations might issue nationwide training services to benefit all businesses
- Gov. could issue training in colleges and other centers from taxes

Monopoly (name stakeholders affected, and possible ways of intervention)

1. Stakeholders affected
- Consumers will have less choice, and the business will not have an incentive to produce better products
- Gov. may be concerned if prices are high and the lack of competitiveness within the industry

2. Intervention
- Gov. may use competition laws
- Consumers may use the internet to buy goods. This can break down monopoly situations