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

    cost of sale has increased at a slower rate then turnover, which means that Bellway's cost control strategy has been successful. Turnover is affected by house price and the number that are sold. House prices21 and the number sold have increased every year.

  2. Case Study: The Home Depot

    A difference compared to the first small store is the fact that this one does sells items as lumber but also urban necessities like closet organisers. As the store managers says:,, You have to put in what really sells, there is not much room for mistakes''.

  1. Chinese car market overview. Citroen case study

    China is basically living what Europe and America have lived 15 to 20 years ago. One muss not forget that the car market only started developing itself in the 1950's. In the middle of the 90's, when the demand seriously increased, China then really started developing the car industry, as much as the cooperation with foreign companies.

  2. Toyota Motor Company Limited

    TMC 86.4%, Others 13.6% Production and sales of automobiles and parts 3,038 Siam Toyota Manufacturing Co., Ltd. TMC 96%, Local 4% Production and sales of automotive parts 793 South Africa Toyota South Africa (Pty.) TMC 74.9%, Others 25.1% Production and sales of automobiles and parts 6,948 U.K.

  1. Retailing In India - A Government Policy Perspective

    without bills * One bill for more than one consignment * Under pricing/ under invoicing * Alleged sales of exempted goods * Purchase from bogus dealers i.e bill-trader Industry status to retail will also facilitate the implementation of the Value Added Tax system that is currently facing several hurdles at the state level.

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

    These findings are surprising, since the introduction of the euro is said to have eased the transfer of capital within the European Union, and based on the analysis of Goetzmann et al, one would expect higher correlations in such periods.

  1. Environmental Analysis Of Landis Lund.

    These barriers may be political, social, economic or technological. States can create monopolies in industries they wish to control, such as water and electricity. Other entry barriers into a monopolistic market can be through the exclusive rights of the countries natural resource, such as the government of Saudi Arabia and oil fields.

  2. Discuss the view that the free market economy encourages negative externalities and thus the ...

    Prices perform three crucial functions in the free market economy, the signaling function, the incentive function and the allocative function. Prices carry information about consumers' preferences to producers via the dollar vote. Consumers express their preferences through the prices they are willing and able to pay and producers produce accordingly.

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