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

Explain the Main Sources of Market Failure that Can Occur in the Market System and Discuss the Positive and Negative Effects of Government Intervention to Deal with these

Extracts from this document...

Introduction

´╗┐Sang Hyun Lee McCartney 11th July, 2012 Explain the Main Sources of Market Failure that Can Occur in the Market System and Discuss the Positive and Negative Effects of Government Intervention to Deal with these Government to intervene in order to maintain the free market is not only unnecessary, it would be very wrong. Companies in the inadequate intervention by the outside power fundamentally contradict the purpose of the free market. This is a good or bad thing? This paper focuses on that the definition of market failure, how the free market works, and main sources of market failure, the positive and negative effect on government intervention. Market failure occurs when free markets fail to allocate efficient or optimal resources. Therefore economic and social welfare will not maximize. This causes to a loss of economic efficiency. figure 1: < Market price in free market > Not government but private owners are the owner of free market economy about all the factors of production; capital, land and labour. As you can see figure 1, the market price to meet demand and supply curve achieves the equilibrium price. If the equilibrium price gets out of the point of intersection, it means that government intervention cause to government failure in the long run. ...read more.

Middle

As you can see below diagram, this provides a way of picture the effects of negative externalities caused by production. The important thing is to know that difference between private and social costs. Figure 2: <Market failure from negative externalities> (<as-marketfailure-negative-externalities_clip_image007.jpg> n.d.). Second, usually, free market economy will fail to deliver efficiently certain public goods and services. To provide pure public items, tax, or duty charges are supplied through other forms. This is a subjective judgment on the derived benefits. Example of missing market, there are a lot of goods that have a public factor however they are not public goods. Like, congested motorway. Third, market failure under monopoly is main source of market failure. Imperfect competition can cause to market failure. Monopolists waste scarce resources. It means that high quality of marketing designed to raise brand loyalty and construct barriers of entry. The monopoly of private business is quite unusual case. As a matter of fact, many governments in the world have particular provisions to intervene monopolistic market. The example of similar situation about monopoly in real world is Microsoft which product is homogeneous. In their situation, one seller is dominating the market and there are high barriers to entry. ...read more.

Conclusion

And an efficient subsidy can correct market failure. But there is a negative effect on subsidy. In developing industry, they can make the market industry less competitive by giving a subsidy the poor part of market. Subsidies is not good for developing country in industry and in doing so maintain the poorer companies well, thereby disturbing long term growth. Lastly, government can pass the law which ban the sale of alcohol or smoking in common place. Such like these regulations may be useful for making fresh competition. For example, laws can break up the existing monopoly power in competition market. A real example of this is the competition for British Telecom. This is known as market liberalisation. But government regulations do not always work on intended way. They can impose a lot of costs on the poor. The more citizens are to escape laws, the less effective they are. Up to now, this essay discussed about two main points. The first thing was three main sources of market failure like externalities, missing market, and lack of competition and the second point was positive and negative effects of government intervention such as tax, subsidy, and regulation. To sum up, Government intervention in the free market is basically aimed in declining inequalities and injustices of market failure even though there are some risks of occurring other economic problems. ...read more.

The above preview is unformatted text

This student written piece of work is one of many that can be found in our International Baccalaureate 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 International Baccalaureate Economics essays

  1. Economics Project Market Failure

    However, as the demand is inelastic it does not react much to the rise in price and thus the quantity consumed remains the same thus defeating the main purpose of taxation. 3 of 6 1. The government does not have proper information when setting the level of environmental taxes as social costs cannot be easily equated to monetary values.

  2. Role of ICT for &amp;quot;Make in India&amp;quot; government initiative.

    Is India emerging as an ICT power? . If globalization is a game, then India would definitely seem to be one of its winners. Moreover, some of India?s work in ICT is vulnerable to changing business strategies. Indian government has identified 25 priority sectors, development of these sectors would assure

  1. This essay will evaluate the concept of what negative externalities are and how they ...

    This is able to move the MPC to a point where the producer is producing closer to the equilibrium. If the government is able to make the tax equivalent to the external costs then they have ?internalized the externality?. However, if the government is not able to equal the external

  2. Explain how interdependence and uncertainty affect the behavior of firms in the oligopolistic market

    Although this all is very useful a sometimes even more important component are price collusion in oligopolies. One major type is tacit collusion. Hereby is meant if there is one leading firm, which establishes new prices, usually other firms will accept these new prices and adopt them.

  1. What has happened to Canada's demographic over the past 50 years? What are ...

    Another interesting fact is that the fastest growing group of Internet users is above the age of 50. Older workers may have different methods of learning than younger workers, but they do not learn slower than them. Myth 2 ________________ Myth: Older workers are less creative/innovative than younger workers Fact:

  2. 15 Historical Economic Questions on Mercatilism and the Development of European Countries.

    Different geography meant different climates; as a result primary climates would see prosperous agriculture. Having prosperous agriculture while many poorly located nations were still trying to get it started was a huge benefit. This is because their advanced agriculture would decrease the allocation of land, labor, and capital towards other

  1. Discuss and evaluate the proposition that perfect competition is a more efficient market structure ...

    While the oil producing nations themselves are not monopolies, the collusive oligopoly they are in act as a monopoly. OPEC sets quotas of production, to curb supply and raise prices. As oil is a large part of the average citizens disposable income, the raising of these prices, often means that

  2. Use a diagram to show the consequences of government imposing a price above or ...

    Because illegal economic activities would occur, the government would then need to hire inspectors. These inspectors would have to supervise the oil market. Hiring inspectors would cost the government more money; therefore the government spending will increase. However, the producers of oil that are investigated would still find a way around the rules and regulations from the inspectors.

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