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With the use of examples, What is meant by 'Market Failure'?

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Introduction

5/11/02 With the use of examples, What is meant by 'Market Failure'? Market Failure is the inability of demand and supply to allocate resources in an efficient and effective way. When market failure occurs, the market mechanism has been unable to achieve its functions. In the event of market failure, when rationing resources, the market will exclude some consumers, the 'have-nots'. Similarly, when co-ordinating demand and supply, the small demands, or minority wants, are ignored. When trying to signal appropriate quantities of demand and supply and prices to charge, the market sometimes suffers from imperfect knowledge, giving out the wrong information. Finally, when trying to encourage enterprise in all industries, the market is unable to control each industry, and deficiencies such as monopolies within industries arise, hindering enterprise. In an ideal market when market failure is not present, a model of the market would look like: However, many of the markets we currently have do not have a model of this nature. One high-profile example at present within the UK economy is the National Health Service. ...read more.

Middle

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. ...read more.

Conclusion

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. ...read more.

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