• Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

Explain how market failures can occur

Extracts from this document...

Introduction

Market Failures Stephanie Merks a.) Explain how market failures can occur b.) What policies can governments use to correct market failures? A Market Failure is a situation in which uncontrolled market forces lead to an under allocation or over allocation of resources to a specific activity. When these failures occur the government intervenes and puts up policies to try to eliminate the problem. The governments has many general economic goals that they want to achieve so that their economy is in good health. Some of the main goals include low unemployment, low inflation, a balance of payments, economic growth and a fair distribution of income and wealth. These are all to satisfy the people of their respective countries. Unfortunately for them, this cannot all be true because of many internal and external market pressures out their control. This is why markets experience booms and slumps, where the business cycle goes through recessions and recoveries. During a boom, increases occur to put a market closer to some of its goals. Although, some problems can occur for the increase in inflation and imports, which disturb the balance of payments and therefore may help bring the market into what is known as a slump. ...read more.

Middle

When there is no free market mechanism, for instance when one company monopolises a certain supply or manufacturer of goods, prices can spin upwards out of control. The lack of competition allows these companies to set their prices at virtually any level without losing demand for their products. In an ogliopolistic market the main producers can come together to form a cartel, where the all decide to raise their prices together and control supply. Governments have to set up policies to reduce and eliminate restrictive practices that can put an unfair lead to one company or individual. Antitrust laws make it difficult for these cartels and monopolies to exist, so by enforcing them the government improves competition and avoids price fixing. To prevent one company from having a majority stake in the market the government has put in place the monopoly and merger commission. This commission researches the relative competitive position of companies, which want to merge to avoid a too strong monopolistic position in a certain segment of the market. This commission can effectively block companies from merging together. Governments can also start nationalization to diminish the domination of monopolies. Externalities are another problem that can lead to market failure. ...read more.

Conclusion

Provision and finance of merit goods encourages positive externalities by increasing productivity and GNP. By providing schools and hospitals the education levels rise as well as the percentage of the population able to work. Goods can also be made compulsory to enforce the use of their positive externalities. For example, the law of helmets being used on scooters and motorbikes. Governments use some policies to discourage negative externalities. They use taxation to slightly reduce supply and raise prices so that demand falls for the product. This way the negative externality is internalized. For example, the gas-guzzler tax in which the taxes for a polluting car are increased to discourage people from buying them. Permits are implied so that people have to pay to have a right to a negative externality. The more people who want to use the externality, the more demand for the permit, which leads to an increase in cost, and therefore a drop in demand and again, a reduction in negative externalities. Partial bans can be imposed to reduce the amount of users for example the smoking age of 18 in America. Complete bans for undesirable goods can also be put into place to stop the negative externality completely. Although, this is never 100% successful because of the resulting black-market for, for example, cocaine. Litigation is another form or restriction where the legal system is used to discourage negative externalties. ...read more.

The above preview is unformatted text

This student written piece of work is one of many that can be found in our GCSE Economy & Economics section.

Found what you're looking for?

  • Start learning 29% faster today
  • 150,000+ documents available
  • Just £6.99 a month

Not the one? Search for your essay title...
  • Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

See related essaysSee related essays

Related GCSE Economy & Economics essays

  1. The Quest for Optimal Asset Allocation Strategies in Integrating Europe.

    Ehling and Ramos (2002) specifically test whether the advent of the EMU really has an impact on portfolio strategies. In order to do so, they try to isolate the EMU effect by considering four different samples: 11 EMU countries, 3 European Community (EC) but non EMU countries, 3 candidate countries who are in the

  2. Chinese car market overview. Citroen case study

    * to make Europe's funding go further. * to raise the EU's profile in China. The new president for China: Hu Jintao was selected Saturday to replace Jiang Zemin as the president of a fast-changing China, the last major step in a sweeping transition to a younger generation of leaders that has been years in the making.

  1. Bellway Plc is a holding company with subsidiaries; its main subsidiary company is Bellway ...

    Therefore successful companies have exhibited a strategy of dominating the market through acquisitions; shifting the industry market structure from monopolistic to oligopoly. No individual company claims 10% of the sector15. Acquisitions would reduce competition and supply cost efficient developments by acquiring resource-supply companies, which would lead to better market and product development.

  2. An Empirical Investigation into the Causes and Effects of Liquidity in Emerging

    There is no single measure that unequivocally measures tightness, immediacy, depth, breadth and resiliency. The bid-ask spread is a measure that is frequently used in econometric analysis of fixed income markets.

  1. To what extent do market failures result in a similar optimal allocation of resources ...

    A general consensus states a positive incidence of technological progress on growth, competitiveness and employment. Enormous amounts of money are spent on innovation and studies reveal that the economic return on innovation is very high in relative terms. Reviewing the diagram on returns to innovation below can see this.

  2. Case Study: The Home Depot

    Changing consumer attitudes: The consumer attitude in the 80's was an attitude of: spend, spend, spend. In the 90's this attitude changes to one which was oriented on value. Because people became more value oriented, they became more home pride.

  1. Environmental Analysis Of Landis Lund.

    (Also known as Planned Economies). Every citizen works for the country, there is no unemployment as there is always something to be done. The exclusive way in which the government controls the economy can cause great inefficiencies. It is perceived that the government are experts in business and therefore have the ability to make fundamental economic decisions.

  2. Toyota Motor Company Limited

    Moreover, Toyota sold most vehicles in New Zealand for the 14th consecutive year, recording unit sales in the Oceania market of 180,000 vehicles in the year under review.9 Middle East: Sales in the Gulf countries remained brisk. In particular, sales of the Camry and the Corolla were favourable, outperforming initial

  • Over 160,000 pieces
    of student written work
  • Annotated by
    experienced teachers
  • Ideas and feedback to
    improve your own work