As productive and as efficient as our modern
economy is we cannot meet all of our needs and all of our wants. This
being the case, an certainly no one would expect perfection, there is
clearly some failure on the part of the market to provide these goods
and services. While the term failure may be a tad harsh, it is the
essence of what has occurred… a market failure.
Market failure – The situation that exists when
the market fails to function properly. Market failure occurs when the
following condition exist:
- When adequate competition does not exist.
In an age where mergers are all too common, the result has been an
increase in larger and fewer firms in many industries. In extreme
cases, this results in a monopoly. The greatest threat that a
monopoly poses is that it denies consumers the benefit of choice
and competition. Because a monopoly occupies the top spot in its
market, it can use its position to impede competition and restrict
production. Thus in the end there are artificial shortages and
higher prices. Inadequate competition may also enable a firm to
influence politics by means of economic strength. In the past
there have been executives who furthered the political careers of
those closest to them. Though it is not necessary for a business
to be a monopoly in order to influence politics, it certainly
helps. A large corporation may simply want tax brakes on a state
or local level. If the government refuses, then the plant may
threaten to moves its facilities elsewhere. Because the government
does not want an economic loss to its area, it may acquiesce to
the demands of the corporation. In order to efficiently allocate
resources, consumers, business people, and government officials
must have adequate information about market conditions. Some of
which is easy to obtain like sales prices or want ads. Yet there
is a little more difficulty in ascertaining information about a
companies earnings and dividends.
- Buyers and sellers are not well informed.
Without information uneducated decision are made. This leads to
mistakes and thus, market failure.
- Resources are not free to move from one
industry to another. This is known as resource immobility. Resource immobility is a difficult problem in any
economy. The efficient allocation of resources requires that land,
labor, entrepreneurs, and capital be free to move to markets where
returns are the highest. But there are times when a business that
is located in a certain community decides to up and leave, leaving
hundreds unemployed. The consequence of the move is a reason that
may hamper the corporation from taking its business elsewhere.
Resource mobility is considered ideal in the competitive market
economy, but is actually much more difficult to accomplish. When
resources are immobile, markets don’t function, as they should.
- Prices do not reasonably reflect the costs
of production. This represents a problem because then wealth is
being redistributed unfairly and prices are too high.
an economic side effect that affects an uninvolved third party. These
are also examples of market failures. There are two types of
- Negative externality– harmful side effect that affects an uninvolved
third party. In most events, it constitutes external cost.
- Positive externality– beneficial side effect that affects an uninvolved
An externality, by definition, is an
economic side effect that either benefits or harms a party not
directly involved in the activity. A negative externality is an
action that harms a third party resulting in external cost. An
example of this would be the construction going on on the LIE.
Because the roadway is being widened, trees along side have been
taken down, thus exposing the once secluded service road and the
homes that are alongside it. This construction has annoyed
drivers, who have to put up with the mess and homeowners as well.
A positive externality is if the economic action benefits a third
party. Such an example can be drawn from the previously mentioned
one. The construction on the LIE may cause traffic tie-ups, but
local businesses may benefit from the traffic, which detours by
their shops, and the workers who may require services from one of
Public goods are those goods and services
provided by the government because a market failure has occurred and
the market has not provided them.
Sometimes it is in our benefit to not
allow for a market provision. In the case of police, national defense
and public education it can be argued that private provision of these
services would be less desirable for a variety of reasons.
Public goods are economic products that are
consumed collectively, like highways, sanitation, schools, national
defense, police and fire protection.
All members of society should theoretically
benefit from the provision of public goods but the reality is that
some need them more then others. For example the wealthy do not need
welfare and the elderly still pay for school taxes. This leads to the
inevitable argument about paying for public goods…. taxes!