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Market Failures

Market efficiency occurs when there is adequate competition and information, resources can flow freely, and prices reflect production costs. Market failures happen due to inadequate competition, information, resource immobility, externalities, and public goods.

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Market Failures

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  1. Market Failures • Market Efficiency Occurs When: • Adequate competition exists • Buyers and sellers are well-informed • About conditions and opportunities • Resources are free to move from industry to industry • Prices reflect costs of production • If any of the above do not occur, market failure occurs

  2. Inadequate Competition • Dangers of Monopolies • Denies consumers competition • Inefficient usage of resources • Economic and Political Power • Large businesses can influence politics • Get members elected • Threaten to leave area

  3. Inadequate Information • To allocate resources efficiently, everyone needs adequate information • Essential to know all markets • Not just those a person is involved in • Ex. Business making shoes, but would be more profitable making tents • Free-enterprise needs a large amount of information

  4. Resource Immobility • It is essential that resources can be allocated quickly • To determine mobility, one must look at the area • A secretary in a city has high mobility • A large factory shuts down, laid off workers will have a hard time allocating their resource

  5. Externalities • Externality – economic side effect • Negative Externality • Ex. Adding on to an airport • People near by experience added noise • Positive Externality • Ex. Adding on to an airport • Creates more jobs for people • Externalities and Market Failures • Costs and benefits are not reflected in market prices

  6. Public Goods • Products that are collectively consumed • Free goods • Market economy produces goods that can be withheld if people refuse to pay • Public goods cannot be withheld • Like National Defense • Plus, how would you charge people for defense?

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