Market Failure

Sunday, 2 May 2021 10:43 am

• Markets are efficient

○ Freem markets are efficient because market forces determine the answer to the
important economic questions
§ What to make
§ For whom
§ How much
§ How
○ Free markets mean that we can satisfy as many consumers and producers at the
same time with our scarce resources
○ Efficiency in economics is about maximising welfare which is measured by total
surplus
○ Economists want to see a situation where resources are allocated so that society
maximises net benefits (total surplus).
○ Economics is all about scarcity and the problem of choice
○ Trade off
§ Scare resources and unlimited wants mean that there is always a trade off
Measured as opportunity cost.
§ Market systems used demand and supply to measure benefit and costs.
§ But there are occasions where the market doesn’t make the best choices i
allocation of resources so total economic surplus is not maximised when t
occurs the market results in an outcome that it not socially optimal
§ This provides a rational for government intervention to correct the proble
• Market Failure
○ There are times when the market through the price mechanism is not capable o
producing the optimal outcome for society.
○ Market failure occurs when resources are not allocated efficiently so this means
total surplus is not maximised
○ This results in DWL
○ Market failure is the inability of the market to determine the use of and allocatio
resources in the way society most desires.
○ Types of failure
§ There are a variety of types of failure when it occurs the government uses
as means of justifying intervention into a market.
□ Government intervention to correct failure is usually to improve the
social benefits from the market system by
® Improving efficiency
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○ Types of failure
§ There are a variety of types of failure when it occurs the government uses
as means of justifying intervention into a market.
□ Government intervention to correct failure is usually to improve the
social benefits from the market system by
® Improving efficiency
® Influencing the nature or price of the goods
® Responding to fluctuations in economic growth.
□ Government intervention can cause failure
□ Types
® Market power
◊ Monopoly or oligopoly
® Externalities
◊ These can result from consumption or production and c
be positive or negative
® Public Goods
® Common property goods
® Equity