1741140000_G9_-Market_Failure

Market Failure

• Definition: Market failure occurs when the market mechanism fails to allocate resources efficiently.

  • Types of Efficiency:

    • Social Efficiency

    • Allocative Efficiency

    • Technical Efficiency

    • Productive Efficiency

Types of Efficiency

• Social Efficiency: Considers external costs and benefits.

• Allocative Efficiency: Society produces goods and services at minimum cost that are in demand by consumers.

• Technical Efficiency: Goods and services are produced using the least amount of resources.

• Productive Efficiency: Production occurs at the lowest factor cost.

Allocative Efficiency

• Also known as Pareto Efficient Allocation.

• Resources cannot be adjusted to benefit one consumer without harming another.

• Named after Vilfredo Pareto (1848–1923).

Causes of Market Failure

1. Imperfect Knowledge:

   • Consumers lack adequate technical information.

   • Misleading advertising.

   • Producers unaware of all opportunities.

   • Inaccurate productivity measurements.

   • Decision-making based on past experiences.

2. Differentiated Goods:

   • Branding affects perception of value.

   • Designer labels may not equate to higher quality.

   • Lack of understanding the impact of technology.

   • Challenges in product labeling and information clarity.

3. Resource Immobility:

   • Factors affecting mobility include:

     • Labor Immobility: Issues arise from geographical and occupational barriers.

     • Capital Immobility: E.g., under-utilization of assets like the Channel Tunnel.

     • Land: Inflexible allocation where it is needed (e.g., urban areas).

4. Market Power:

   • Presence of monopolies and oligopolies.

   • Collusive behavior, price fixing, and abnormal profits.

   • Creation of barriers to entry for new competitors.

5. Inadequate Provision:

   • Merit Goods:

     • Essential goods that may not be purchased in sufficient quantities (e.g., education).

   • Public Goods:

     • Goods that will not be provided by the market due to free-rider issues and non-rivalry.

   • De-Merit Goods:

     • Goods that are over-produced but not in societal interest (e.g., tobacco, alcohol).

6. External Costs and Benefits:

   • External Costs: Costs inflicted on third parties from decisions (e.g., pollution).

   • External Benefits: Outcomes positively affecting third parties (e.g., education and public services).

7. Inequality:

   • Issues include poverty, distribution of ownership of factors, income and wealth disparity, and discrimination.

Measures to Correct Market Failure

• State Provision: Public sector involvement in providing goods/services.

• Extension of Property Rights: Clarifying ownership and rights.

• Taxation: Adjusting behavior through financial methods.

• Subsidies: Financial support to encourage production/consumption.

• Regulation: Setting rules to maintain market integrity.

• Prohibition: Banning certain goods/services.

• Positive Discrimination: Favoring specific groups to correct imbalances.

• Redistribution of Income: Adjusting income distribution for greater fairness.