Economics why do some markets fail

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  • Created by: bethany
  • Created on: 13-01-13 16:20
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  • Why do some markets fail?
    • Externalities
      • the cost faced by third party consumers or businesses created from an activity they are not involved in. External costs are not taken into consideration in the price mechanism
    • Public goods
      • Non- rivalry and non - excludability
    • Unstable commodity market
      • Volatile prices because: supply changes due to the weather conditions which affect the size of harvest, when supply falls short - prices rise, when supply exceeds - prices fall, effects amplified by price in-elastic demand and Speculators betting future prices
      • How does volatility affect their producers?
        • RISK: profits and income unpredictable and may inhibit investment spending
        • POVERTY: sharp falls in income can cause hardship and poverty and also unemployment
        • BALANCE OF PAYMENTS: big swings in prices cause large changes in export revenue - affecting their balance payments and their ability to finance essential imports of food and technology
    • Imperfect market knowledge
      • ASYMMETRIC KNOWLEDGE- when the seller knows more than the consumer
      • Symmetric knowledge - when the consumer and producer have equal market knowledge
      • leads to under consumption of merit goods OR over consumption of demerit goods
    • Labour immobility
      • Geographical immobility - refers to the obstacles which prevent labour moving from one area to another to find work
        • relaxation on planning laws, increase the construction of social housing, offering housing subsidies, improving the operation of job centres
      • Occupational immobility - refers to the obstacles which prevent labour from changing their type of occupation to find work
        • increase the provision of training schemes, increase the provision of further education, increase the provision of higher education



An excellent summary of why markets fail. A mind map is a very good method for this kind of information.

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