looked at in terms of the functions of the market, it is clear that the market has failed in part in allocating resources efficiently and effectively through demand and supply. For example, when co-ordinating demand and supply into an equilibrium, the market failed to signal accurately the quantities of demand and supply. The result of such failure is that the supply of the NHS has not been sufficient to cover the demand, resulting in excess demand. Even with the arrival of private sector healthcare, such as BUPA, an equilibrium has not been found within the market, and a negative externality of this is that there are long delays for necessary healthcare, which can have fatal consequences.
Another example of market failure is markets which suffer from monopoly firms. The lack of
competition within these markets enables the monopoly to grow, and then barriers to entry occur, as the monopoly firm does not want others coming into the market and causing competition, rivalry between firms. Without competition there is also no drive for the monopoly firm to become more efficient, preventing the exploitation of economies of scale and preventing the most efficient and effective use of resources. Alongside this, the monopoly does not need to compete with other firms in price competition, and can set high prices without fear of losing market share to competitors, excluding some consumers from benefiting from the good or service being provided.
Aside from the effect of externalities and a lack of competition, other sources of market
failure include missing markets, as highlighted by the minority wants being ignored due to the markets inability to co-ordinate demand and supply in an efficient and effective way; an uneven distribution of income and wealth, which promotes the idea of the ‘haves’ and the ‘have-nots’, causing the exclusion of consumers from certain goods and services; a lack of information between producers and consumers, resulting in excess demand or supply to occur and an inefficient use of resources; and factor immobility, both geographically and vocationally, which prevents labour being used as efficiently as possible, and again contributes to an inefficient and ineffective allocation of resources.
Critically Discuss the view that any attempt to use public policy to correct ‘Market Failure’ will lead instead to a problem of ‘Government Failure’
Government failure is when a government fails to intervene in a market economy to correct inefficient allocation of resources. Normally the government intervention comes in an effort to correct the events of market failure, but often the government is forced to create a fresh problem as a result of correcting the original problem.
Examples of government failure include the NHS, when in an attempt to provide health care free at the point of use for everyone who was unable to afford private health care, the government inadvertently created far too much demand for the level of supply it was able to provide, creating excess demand which resulted in inefficient allocation of resources.
Another example is the introduction of the state pension. Again, it was an attempt to provide a means of income for those who could no longer work due to age constraints, especially for those who could not afford to keep paying into a private pension scheme during employment. However, again a state of excess demand was created and the government could not afford the level of expenditure necessary on the state pension, resulting in it being decreased to a level that could not be lived off beyond employment on its own, and was necessary to be combined with money from a private pension scheme. Ironically, part of the governments problem with the state pension was that as a result of better and more widely available health care the elderly generation was in better health and able to live for longer periods after unemployment, requiring greater expenditure from the government which could not be afforded.
Public policy is essentially the use of firms in the public sector to help create a balanced market between both the private and public sectors. Firms operating in the private sector are firms run by private individuals or groups, with the underlying aim to survive, but with other aims on top of that, often to achieve profit maximisation. Firms operating in the public sector however are firms run by, or in accordance with the government. As such they do not need to worry about survival, because they will be subsidised by the government when necessary, and will have aims other than profit maximisation, such as non-rivalry and non-excludability, offering the good or service they provide to everyone at the lowest possible cost.
