Market Failures Unit Six, Lesson Two Economics
Market Failures • A competitive free enterprise economy works best when these conditions are met: • Adequate competition • Buyers and sellers are reasonably well-informed • Resources are free to move from industry to industry • Prices must reasonably reflect the costs of production
Market Failures • Market failures can occur when any four of these conditions are significantly altered. • Failures can happen on both the supply and demand side of the market. • When a failure occurs, prices are not fair and reasonable and consumers and producers are both hurt.
Inadequate Competition • With mergers and acquisitions, competition becomes scarce and the following consequences could occur: • Inefficient resource allocation • Higher prices and reduced output • Economic and political power (monopolies can begin to lobby and get things they want)
Inadequate Information • If consumers, business people, and government officials do not have adequate information about market conditions, the market cannot be properly and fairly run.
Resource Immobility • Land, labor, and capital must be allowed to move to areas where returns are highest or markets will not function efficiently.
Limited Externalities • An externality is unintended side effect that either benefits or harms a third party not involved in the activity that caused it. • Externalities may be negative or positive. • Negative externality—the harm, cost, or inconvenience suffered by a third party because of actions by others. Ex: airport built near your house
Limited Externalities • Positive externality—a benefit received by someone who had nothing to do with the activity that generated the benefit. Example: restaurants and hotels near a new airport get more business • Externalities are market failures because their costs and benefits are not reflected in the market prices that buyers and sellers pay for the original product.
Need for Public Goods • Public goods are products that are collectively consumed by everyone, and whose use by one individual does not diminish the satisfaction or value available to others. • The government must supply these goods for the collective population if markets are to operate correctly. Markets are good at supplying goods to meet individual wants and needs, but they seem to fail to satisfy collective wants and needs.