Market Failure

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  • Created by: maisiegul
  • Created on: 07-06-16 14:49

Market Failure

.A market is a place where the buyer and seller come together to conduct a transaction

.When markets run freely this leads to improved efficiency

.Efficiency means that resources are used to the best potential

.When businesses run efficiently, business costs are kept low to maximise profits

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What is market failure?

.Market failure is when resources aren't allocated efficiently

.Resources: land, labour, raw material, enterprise

.It means that the price of goods and services and the quantities produced aren't at the level that ensures economic welfare

.It can lead to goods under produced or not even produced at all

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Types of Market Failure

1) EXTERNALITIES
= when the costs and benefits to produce a good do not match the true costs and benefits to society
POSITIVE
-It occurs when the benefits to society exceeds the benefits to the private business
-E.g increased people attending university, employment opportunities in local towns
-Most merit goods are positive externalities too
NEGATIVE
-It occurs when the costs to society exceed the costs to the private business
-E.g the air pollution created from manufacturing goods or noise from building sites

2) PUBLIC GOODS
= goods that can't be prevented from being consumed by everyone. Also their consumption doesn't limit someone else's consumption
-E.g public defence, street lights, police force, law enforcement, roads
-There are 2 characteristics
1) Non-rivalry= consumption for one doesn't limit the consumption for another
2) Non-excludability= goods can't be excluded from anyone even if they haven't paid
-Free raider problems: in a free market they may be under-provided (so privatise them)

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Types of market failure 2

LACK OF COMPETITION
= when this occurs businesses can produce output for high prices and low quality as they don't have compete . It can lead to monopolisation and so they dominate the market
-E.g when there was more discount airlines, easy jet had the lower prices

  • To increase a markets efficiency and prevent monopolisation: the government regulates ( in a mixed economy) and prohibits large businesses taking over others businesses in the market. This ensures it doesn't make goods and services high price and low quality

MERIT AND DE-MERIT GOODS
Merit= goods and services that the government think we under consume ( education and healthcare) These lead to positive externalities
De-merit = goods and services that the government think we over consume ( tobacco and alcohol) These lead to negative externalities
-The government intervenes and imposes several taxes on de-merit goods (e.g taxation on cigarettes)
-The government provides merit goods in our mixed economy. As it they don't fund them, no one else will

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Types of market failure

5) UNEQUAL DISTRIBUTION OF INCOME
-the market may result in wide distribution of income
-The richer earn 40% of the UK total income whereas the poorer earn 10% of total UK income

6) IMMOBILTY OF LAND AND LABOUR
= labour doesn't 'move' to where it is in greatest demand. Also people can not move from place to place
1) GEORGRAPHICAL IMMOBILITY
-When workers aren't willing to move from region to region. Therefore there could be many jobs available in one area whereas in other region unemployment is high
2) OCCUPATIONAL IMMOBILITY
-Workers aren't willing to move between industries
-Is has effected the UK growth of financial services and decline in manufacturing sector. This had led to the need for worker mobility
3) CAPITAL IMMOBILITY
-It is difficult and expensive to move capital between countries
4) ENTREPRENEURSHIP IMMOBILITY
-The unwillingness to take risks and develop, organise business in competitive market globally

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How to solve market failure

1) EXTERNALITIES
. Carbon taxes/ Tradable permits means that companies pay to pollute the environment
.Indirect taxation means that less pollution is made because output falls and price increases
. Subsidies given to polluters to encourage renewable use of energy etc

2) DE-MERIT AND MERIT GOODS
.Indirect taxation on de-merit goods lowers their consumption
.Subsides given to merit goods and services to encourage their production and thus consumption

3) PUBLIC GOODS
. Privatised public goods in order to encourage competition and paying for Goods to stop free rider problems
.Donations to keep the public goods public
.Legislation

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How to solve market failure

IMPERFECT COMPETITION

-governments control how much multinational corporations can buy other businesses so that they don't saturate the market

IMMOBILITY OF LAND AND LABOUR

-Move jobs out of the areas of many jobs to places where there is a lack of jobs. For example London to South Wales: DVLA moved from London to Swansea
-Improve transport links

UNEQUAL DISTRIBUTION OF INCOME

-Taxation: higher earners pay more tax compared to lower earners

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