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Market Failures

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.

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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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