MARKET FALIURE

As your classmate (or a group) presents, take your notes here:

Presenter:

Topic: MARKET FAILURE

Key Message:  Efficiency

(summarize the key
 Exploitation
message or theme of
the presentation)  Under/Overproduction
 Information Failure
 Abuse of Monopoly power
 Immobility of Resourcse
 Short -termism

 Market failure occurs when the market force fails to

produce products that consumers demanded, in the
right quantities.
 Indicators of market failures:
-shortage
-surplus
-high price/poor quality
-lack of innovation
 Price may be high due to competitive pressure.
 The lack of investment in expenditure and research
can slow down the improvement of a product

 Overproduction and overconsumption of goods or

services which cause negative externalities on a third
party
  Underproduction and underconsumption of goods
or services which cause positive externalities on a
third party
 Failure of the private sector to provide public goods
due to lack of a profit motive
 The existence of a monopoly that charges high
prices and exploits customers


1st point: EXTERNALITY

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 Third holder impact (not the shareholders) the
consumption and production of some products may
affect people who are not involved directly to the
consumption and production.
 In such cases the total benefits and total cost to
the society called social benefits and social
benefits are greater than the benefits and cost to
the consumer ad producers.
 This is known as Private benefits and private costs
 Cost to a third party is called external cost
 Can be positive or negative
 Not directly related to the firm and not consumers
 Small scale business-infrastructure development,
electricity-helps other people
 CBA-cost benefit analysis
 Private cost +External cost =Social benefit
 Maximum benefit to the society -socially optimal
level of output-the level of output where social cost
equals social benefit and society welfare is
maximized
 2 graphs -overproduction
 -underproduction

 Demand based just of private benefits to those

consuming the product will lead to under
consumption and hence under production if the
total benefit to the society is greater.

2nd point: MERIT GOODS

(summarize the 2nd
point)  Product which the government consider
consumers don’t fully appreciate on how
beneficial it is to them-so hence the product will
be under consumed if left to the market force
 2 graphs -underconsumption of merit goods
-effect of subsidy
 Direct provision & Subsidy
 When there is underconsumption government
will give a subsidy so supply will increase.
 Government will provide information on the
benefit of consuming the product. -this should
help increase demand for the product
 If government thinks the product is undervalued
or there are considerable external benefits -it may
be provided for free to consumers

3rd point: DEMERIT GOODS

(summarize the 3rd
point)  Are more harmful to consumers and generate
external cost
 Generally overconsumed hence overproduced
  To government tackles this problem by raising the
price and imposing tax
 Helps discourage consumption-by providing
information on harmful effects
 Bans on products -this can lead to black markets
 Welfare loss
 Such goods generate negative externalities

PUBLIC AND PRIVATE GOOD

Public Good

 The degree of market failure is greater in public

goods
 If left to the market force no good will be made.
 If public good are provided for some people
others can consume them without paying
 Those who take advantage of this are called Free
Riders
 Non-Excludability
 Non-Rivalry -the consumption from one
consumer will not reduce other consumers ability
to use the product
 They are non-rejectable -not possible to reject
the service
 The cost of supplying a public good to one more
consumer is often zero.
 Financed through taxation

Private Goods

 Merit and demerit goods are private goods

 These products are rival and excludable
  In these case-we can stop non payer from
enjoying the products-if one consumer consumes
the product the other consumers can’t
 Markets will provide private good, not necessarily
in the right quantities

 Excludability- a good or service is

called excludable if it is possible to prevent
people who have not paid for it from having
access to it.
 Rivalry
 Quasi-public good-have the characteristics of
both public and private good, including partial
excludability and partial rivalry
Such as -Roads

ABUSE OF MONOPOLY POWER

 Market failure can arise due to producers having

more market power than consumers.
 If one firm dominates the market -it may not be
allocatively productive or dynamically efficient
 It will lack competitive pressure to respond to
consumer demand.
 If it’s the only firm selling the product then it’s a
monopoly-consumers have no choice but to buy
form that firm
 Abuse of market failure -occur when more than
one firm produces the product -they do price
fixing
 Government may make price fixing illegal
  They may stop firms from merging together -if
they merge they may go against consumer
interest-high price low quality
 Oligopoly-a hand full of producers that share the
same markets;
Price fixing - a practice whereby rival companies
come to an illicit agreement not to sell goods or
services below a certain price.

IMMOBILITY OF RESOURCES;LABOUR

 Occupationally
 Geographically
 Government prevents this market failure by
reducing prices of houses


SHORT -TERMISM

 A risk that market forces may not result in

sufficient resources being devoted to capital
good

Questions  Demerit goods are goods or services which,

(include any questions
you have remaining
after the presentation)
 Merit goods are goods or services which, when
when consumed, cause negative spillover effects
in an economy (e.g. cigarette smoking, alcohol
and gambling). Demerit goods are over-
consumed due to imperfect consumer
information about such goods.
consumed, create positive spillover effects in an
economy (e.g. education, training and health
 care). Merit goods are under-consumed so
government intervention is often needed .
 Free riders are people who take advantage of the
goods or services provided by the government
but have not contributed to government revenue
through taxation.
 Market failure occurs when the market forces of
demand and supply fail to allocate resources
efficiently and cause external costs or external
benefits.
 Private Benefit/Cost: benefits/cost the business
or consumer receives from producing/consuming
the good
 External Benefit/Cost:
advantages/disadvantages society receives due to
us of a certain good/service
 Externalities (or spill over effects) occur where
the actions of firms and individuals have either a
positive or negative effect on third parties.
 External benefits are the positive side-effects of
production or consumption incurred by third
parties, for which no money is paid by the
beneficiary.
 External costs are the negative side-effects of
production or consumption incurred by third
parties, for which no compensation is paid.
 A subsidy is a sum of money given by the
government to a producer to reduce the costs of
production or to a consumer to reduce the price
of consumption.
