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Market Failure

Market Failure. Market Failure. Definition: Where the market mechanism fails to allocate resources efficiently Social efficiency Allocative Efficiency Technical Efficiency Productive Efficiency. Market Failure. Social Efficiency = where external costs and benefits are accounted for

mechelle-emerson
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Market Failure

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  1. Market Failure

  2. Market Failure • Definition: • Where the market mechanism fails to allocate resources efficiently • Social efficiency • Allocative Efficiency • Technical Efficiency • Productive Efficiency

  3. Market Failure • Social Efficiency = where external costs and benefits are accounted for • Allocative Efficiency = where society produces goods and services at minimum cost that are wanted by consumers • Technical Efficiency = production of goods and services using the minimum amount of resources • Productive Efficiency = production of goods and services at lowest factor cost

  4. Market Failure • Allocative efficiency: • Also referred to as • Pareto Efficient Allocation – resources cannot be readjusted to make one consumer better off without making another worse off – zero opportunity cost! • After Vilfredo Pareto (1848 – 1923)

  5. Market Failure • Market Failure occurs where: • Knowledge is not perfect - ignorance • Goods are differentiated • Resource immobility • Market power • Services/goods would or could not be provided in sufficient quantity by the market • Existence of external costs and benefits • Inequality exists

  6. Market Failure • Imperfect Knowledge: • Consumers do not have adequate technical knowledge • Advertising can mislead or mis-inform • Producers unaware of all opportunities • Producers cannot accurately measure productivity • Decisions often based on past experience rather than future knowledge

  7. Market Failure • Goods/Services are differentiated • Branding • Designer labels - they cost three times as much but are they three times the quality? • Technology – lack of understanding of the impact • Labelling and product information Which one is the ‘quality’ item and why?

  8. Market Failure • Resource Immobility • Factors are not fully mobile • Labour immobility – geographical and occupational • Capital immobility – what else can we use the Channel Tunnel for? • Land – cannot be moved to where it might be needed – e.g. London and South East!

  9. Market Failure • Market Power: • Existence of monopolies and oligopolies • Collusion • Price fixing • Abnormal profits • Rigging of markets • Barriers to entry

  10. Market Failure • Inadequate Provision: • Merit Goods and Public Goods • Merit Goods – Could be provided by the market but consumers may not be able to afford or feel the need to purchase – market would not provide them in the quantities society needs • Sports facilities?

  11. Market Failure • Merit Goods • Education – nurseries, schools, colleges, universities – could all be provided by the market but would everyone be able to afford them? Schools: Would you pay if the state did not provide them?

  12. Market Failure • Public Goods • Markets would not provide such goods and services at all! • Non- excludability – Person paying for the benefit cannot prevent anyone else from also benefiting - the ‘free rider’ problem • Non- rivalry – Large external benefits relative to cost – socially desirable but not profitable to supply! A non- excludable good? Would you pay for this?

  13. Market Failure • De-Merit Goods • Goods which society over-produces • Goods and services provided by the market which are not in our best interests! • Tobacco and alcohol • Drugs • Gambling

  14. Market Failure • External Costs and Benefits • External or social costs • The cost of an economic decision to a third party • External benefits • The benefits to a third party as a result of a decision by another party

  15. Market Failure • External Costs • Decision makers do not take into account the cost imposed on society and others as a result of their decision • e.g. Pollution, traffic congestion, environmental degradation, depletion of the ozone layer, misuse of alcohol, tobacco, anti-social behaviour, drug abuse, poor housing

  16. External Costs Price MSC + MPC MPC £12 Value of the negative externality(Welfare Loss) Social Cost £7 £5 Socially efficient output is where MSC = MSB MSB 80 100 Quantity Bought and Sold

  17. Market Failure • External benefits – • by products of production and decision making that raise the welfare of a third party • e.g. Education and training, public transport, health education and preventative medicine, refuse collection, investment in housing maintenance, law and order.

  18. External Benefits Price MSC Value of the positive externality(Welfare Loss) £10 Social Benefits £6.50 Socially efficient output is where MSC = MSB £5 MSB MPB 100 140 Quantity Bought and Sold

  19. Market Failure • Inequality: • Poverty – Absolute and Relative • Distribution of factor ownership • Distribution of Income • Wealth Distribution • Discrimination • Housing

  20. Market Failure • Measures to Correct Market Failure • State Provision • Extension of property rights • Taxation • Subsidies • Regulation • Prohibition • Positive Discrimination • Redistribution of Income

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