Market Failure

8 Key excerpts on "Market Failure"

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  eBook - ePub

  The Economics of Property and Planning

  Future Value

  • Graham Squires(Author)
  • 2021(Publication Date)
  • CRC Press

    (Publisher)

  It has so far been considered that markets can be conceptualised, although the workings of the market are not as clear and simple as classical economic market theory would suggest. As described earlier, there are limitations of not being able to internalise all costs and benefits, and third party external costs and benefits need to be recognised outside of the market transaction. Further market difficulties are their failure to efficiently allocate resources, where conventional free-market theory would suggest is when long-term equilibrium of supply and demand is always achieved. ‘Market Failure’ is the key concept for discussion here and is where the market fails to achieve an efficient allocation of resources. This inefficient allocation of resources certainly applies to environmental resources in their use, production, and consumption within places.

  Table 11 demonstrates the five main reasons why markets fail. The occurrence of monopolies is one way in which the efficiency of markets is restricted, as one supplier in the market would mean that they would be able to fix prices at a higher rate due to lack of competition. Lack of competition may be because there are barriers to entry into the market, for instance the telecommunications infrastructure has often been monopolised by companies. This monopoly power and domination in the telecommunications market has meant that prices are held artificially high without the ability of competitors to enter the market. This has prompted governments to step in and ensure that companies act in the interest of the consumers by breaking into smaller demerged entities with a lower percentage of market share.

  Table 11 Types of Market Failure and Descriptors

  Type of Failure	Descriptors
  Monopolies(including natural monopoly)	• Few producers relative to the size of the market
  Externalities	• External social and environmental costs, in addition to internal market costs
  Public goods (and common property resources)	• No exclusive and non-rival • Owned by no one and used by anyone
  Weak property rights	• Inability of institutions to establish well-defined property rights – market doesn’t function in a complete rational and bounded process
  Asymmetric information	• Producers do not have the same information • Generates moral hazards and adverse selection

  Source: Author

  Monopolies also occur for very practical reasons such as the strategic benefits of being a natural monopoly. A natural monopoly is where it makes sense to have only one producer in a certain market, especially if the addition of one extra unit is made means that a unit cost is lower. An example of a natural monopoly within a place is the utilities that service properties such as electricity, gas, water, and sewage. It would not make economic sense in terms of efficiency if several companies built these service infrastructures, as this would mean that there would be four or five cables and pipes servicing properties in a place when only one would suffice. The practical economic solution would be to have a well-regulated infrastructure that allowed service providers to lease and compete for the single physical infrastructure. Transport links between places would also be argued to form a natural monopoly and hence demonstrate that a complete free-market approach would be inefficient. The rail network that connects cities within national boundaries is often owned by a regulated coordinating body that lease out parts of the track to competitive tender.

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  Market Failure, Government Failure, Leadership and Public Policy

  • B. Dollery, J. Wallis(Authors)
  • 1999(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  The Market Failure para- digm for microeconomic policymaking assumes governments intervene in the public interest to restore economic efficiency. The Market Failure para- digm is thus a normative theory of government intervention insofar as it prescribes how governments 'should' behave. As we shall see, the Market Failure paradigm can be extended to include distributional or equity ele- ments, and its policy implications can be modified in the light of a positive theory of government intervention, namely public choice theory. Sources of Market Failure Economists have identified numerous sources of Market Failure and indeed instances of real or perceived Market Failure are probably limited only by Market Failure and Government Intervention 17 the imaginations of the economic theorists. However, text books typically emphasize six main forms of Market Failure which we will discuss below. Firstly, for Adam Smith's invisible hand to operate properly markets must be competitive rather than monopolistic or oligopolistic. Various reasons exist for the absence of competition in some defined market. Geographic factors such as large distances or isolated locations can mean limited competition. For example, the vast outback of Australia contains numerous small communities often serviced by a single retail supplier. Similarly, limited ownership of some natural resource can confer mono- poly power on a producer. Governments may often create monopolies through the legal system. For instance, patent laws grant monopoly rights to inventors for specified time periods. Similarly, gaming operators are usually given exclusive control over casinos in particular jurisdictions. However, perhaps the most significant in the present context are barriers to entry into an industry which arise from increasing returns to scale. This necessarily implied decreasing average costs over large volumes of output and the potential for natural monopolies to arise.

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  Fundamentals of Environmental Economics

  • Kumar, A(Authors)
  • 2021(Publication Date)
  • Daya Publishing House

    (Publisher)

  Chapter 4 Market Failure Analysis Market Failure analysis is a type of economic analysis. It is important because it can indicate whether there is any prospect of a net benefit emerging form regulatory intervention. In particular, if regulatory intervention takes place when there is no market or regulatory failure, then that intervention will always impose net economic costs, no matter how carefully designed. For this reason regulators are beginning to espouse market and regulatory failure analysis as a tool early in the policy formulation process to help them to determine whether there is a realistic prospect of a net economic benefit from regulatory action. We welcome these high-level commitments as marking clear progress in the broader cause of ‘better regulation’. However, much remains to be done to build clarity on what is meant by ‘Market Failure’ within the context of a proper burden of proper burden of proof for intervention and the purpose of this note is to set out preliminary views on this question. What is Meant by ‘Market Failure’ In considering Market Failure form a regulatory perspective, it is important to draw a distinction between the theoretical notion of Market Failure, which is helpful, as an analytical tool, and a persistent ‘welfare loss’ arising form significant Market Failures that market forces are unable to resolve. At the extreme, Market Failures arise when there are departures from economists’ notion of a perfectly efficient market. In an efficient market firms produce goods and services at the lowest possible cost in terms of resources used and consumers buy the goods and services they want at the minimum possible price for a given quality. Moreover, at this price, supply This ebook is exclusively for this university only. Cannot be resold/distributed. and demand are in balance. To the extent that Market Failures arise, there is a waste of resources known as a ‘welfare loss’.

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  An Introduction to Economics

  Concepts for Students of Agriculture and the Rural Sector

  • Berkeley Hill(Author)
  • 2021(Publication Date)
  • CAB International

    (Publisher)

  7 Market Failure: Some Problems of Using the Market to Allocate Resources

  Introduction

  At several points in the text so far it has been pointed out that the pattern of consumption, production and resource allocation which would result from the free interaction of supply and demand for goods and services may need modifying if the best interests of society are to be served. Examples of this happening in practice are not difficult to come by. The consensus view is that addictive drugs such as opium should not be available on the open market, as would almost certainly happen if the state did not ban its possession and sale. On the other hand, the state provides some goods and services, such as education, without direct charge to the recipient, and uses legislation to compel children to ‘consume’ education until they reach minimum school leaving age. The cost to farmers of some forms of farm capital, such as slurry handling equipment to reduce the danger of pollution, is sometimes lowered by grants, thereby encouraging a greater level of investments, while in contrast the price of consumer ‘luxury’ items is frequently raised by a higher rate of tax than is applied to items such as food. Some utilities such as rural buses and country pharmacies receive subsidies out of taxation and can thereby charge a lower price than they otherwise might.

  Clearly the view leading to these modifications to prices and quantities must be that the pattern of consumption and production which an unhindered price mechanism would result in, is not the optimum. A preferable pattern (preferable that is from the view of society as a whole) can be obtained by adjusting the solution provided through the market. Although the price system can be useful to an economy in indicating the pattern of consumer demand, where current production leaves shortages and surpluses, and in channelling resources into satisfying demand, it also contains imperfections which should be recognized and understood. This chapter explains why society acts to overcome the imperfections and paves the way for a study of the working of the whole economy in the next chapter.

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  Economic Theory for Environmentalists

  • John Gowdy(Author)
  • 2020(Publication Date)
  • CRC Press

    (Publisher)

  6 Market Failure: WHEN PRICES ARE WRONG INTRODUCTION The function of prices in the neoclassical model is to send signals through markets that tell consumers and producers the characteristics of market goods and productive inputs. As dis-cussed in Chapter 5, a perfectly operating price system will lead to Pareto optimality as described in Chapters 2, 3, and 4. In real world situations, however, there are a variety of reasons why prices might not send correct signals about the characteristics of goods and services to consumers or about the characteristics of inputs to producers. In these cases, not only the collective but also the indi-vidual preferences of market participants are distorted, and Pareto optimality is not achieved. Neoclassical economists recognize these shortcomings and refer to them as Market Failure . We saw in the last chapter that the condition for a perfectly operating market economy to reach Pareto optimality is that market prices correctly reflect consumer preferences, input prices correctly reflect productivity, and the prices of goods must equal their marginal cost of produc-Copyright © 1995 St. Lucie Press tion. These conditions are violated when Market Failure is present. Three general types of Market Failure relevant to environmental issues are (1) imperfect market structure, (2) public goods, and (3) externalities. Standard economic policies to correct Market Failure concen-trate on establishing the conditions of Pareto optimality. Neoclas-sical environmental policy, therefore, begins (and usually ends) with recommendations to adjust relative prices. In addition to price adjustments, policy intervention measures include regulation or voluntary compliance. As policymakers seek to correct the value the price system assigns to the functions and services of our bio-physical environment, they face such challenges as intervention failure and existence failure.

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  Economic Principles and Problems - A Pluralist Introduction

  Special Sale for Roskilde University Basic Course in Socio-Economics

  • Geoffrey Schneider(Author)
  • 2023(Publication Date)
  • Routledge

    (Publisher)

  political economy perspective, corporations are externalizing machines. Due to their structural imperative to maximize short-term profits, corporations have an incentive to avoid paying any cost if they can. Therefore, we can expect corporations to attempt to avoid costly recalls of dangerous products, expensive worker safety measures, higher wages, environmental regulations, and any other significant cost, pushing those costs on to the rest of society. In other words, corporations have a direct financial incentive to externalize as many costs as possible. The government’s job is to force corporations to internalize their external costs, making corporations responsible for their products and their impact on workers and communities. The fact that the United States has made limited progress in addressing the Market Failures discussed above seems to indicate that the U.S. government is not very effective in internalizing external costs. Similarly, the fact that the U.S. infrastructure is crumbling and public goods are generally in disrepair indicates a general philosophy of supporting the private sector (via tax cuts) rather than the public sector (via greater spending on government regulatory bodies). Political economists tend to see this social imbalance as a product of the power corporations have in shaping the U.S. economic system via their financial clout and their influence over elections and legislation rather than as the will of the people.

  A more middle-of-the-road mainstream Keynesian approach would acknowledge both perspectives. Markets clearly generate significant Market Failures, and the government is often successful in reducing the negative impact of Market Failures. The government does not always succeed in such efforts due to the existence of government failure. The goal should be to attempt to provide the optimal amount of public goods and control of external costs by weighing costs and benefits. The costs of government failure must be included in the assessment of costs and benefits to accurately determine whether the benefits of government intervention outweigh the costs.

  In future chapters we will take up some of the important themes of this chapter and go into greater detail. In particular, we focus on public goods and the size and role of government, along with two of the most important economic issues of our time—increasing inequality and environmental devastation (climate change).

  QUESTIONS FOR REVIEW

  1. Which of the eight Market Failures do you think is most important? Explain your answer.
  2. Construct a table in which you list each Market Failure, give an example of each one, and list the U.S. government programs designed to correct each Market Failure.

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  Microeconomic Theory

  Basic Principles and Extensions

  • Walter Nicholson, Christopher Snyder(Authors)
  • 2016(Publication Date)
  • Cengage Learning EMEA

    (Publisher)

  (19.40) Copyright 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-300 698 Part 8: Market Failure The intuition behind this condition, which was first articulated by P. A. Samuelson, 9 is that it is an adaptation of the efficiency conditions described in Chapter 13 to the case of pub-lic goods. For such goods, the MRS in consumption must reflect the amount of y that all consumers would be willing to give up to get one more x , because everyone will obtain the benefits of the extra x output.

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  Classic Papers in Natural Resource Economics

  • C. Gopalakrishnan(Author)
  • 2000(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  It stems from basic defects in the current approach to problems of welfare economics. What is needed is a change of approach. Analysis in terms of divergencies between private and social products concentrates attention on particular deficiencies in the system and tends to nourish the belief that any measure which will remove the deficiency is necessarily desirable. It diverts attention from those other changes in the system which are inevitably associated with the correc- tive measure, changes which may well produce more harm than the original deficiency. In the preceding sections of this article, we have seen many examples of this. But it is not necessary to approach the problem in this way. Economists who study problems of the firm habitually use an opportunity cost approach and compare the receipts obtained from a given combination of factors with alternative business arrangements. It would seem desirable to use a similar approach when dealing with questions of economic policy and to compare the total product yielded by alternative social arrangements. In this article, the analysis has been confined, as is usual in this part of economics, to comparisons of the 132 Externalities and Market Failure value of production, as measured by the market. But it is, of course, desirable that the choice between different social arrangements for the solution of economic problems should be carried out in broader terms than this and that the total effect of these arrangements in all spheres of life should be taken into account. As Frank H. Knight has so often emphasised, problems of welfare economics must ultimately dissolve into a study of aesthetics and morals. A second feature of the usual treatment of the problems discussed in this article is that the analysis proceeds in terms of a comparison between a state of laissez-faire and some kind of ideal world.

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