Economics- market failure

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ECONOMICS  OUTCOME 3                 Eleanor Carrol 0402314

A market failure "occurs when there is an inefficient allocation of resources in a free market"

           (Economic Help)

When the market fails for whatever reason then the government steps in and attempts to rectify it.

I would specifically like to talk about four areas, public goods, merit goods, externalities and imperfect competition.

Public goods are goods which do not reduce the consumption for others. In a pure free market economy, goods and services would have to be bought and paid for an individual basis, nothing would be free. This could cause major issues regarding health and education and how much defence would be provided if it was left to the free market? If public goods were left to the market then there would be a market failure because of the free rider problem.  A free rider receives the same benefits as others regarding public goods but does not pay for it.

Merit goods include health, pensions and education and in the UK these are provided by the government as most people do not think ahead and only realise their importance when needed. Young healthy people especially cannot comprehend the idea of old age and illness.

As well as merit goods we have de-merit goods which covers a wide range of goods available by the market from heroin (illegal) to tobacco/alcohol (legal), even fuel is a de-merit good causing externalities (negative ones as there is also positive ones) in that consuming fuel causes negative externalities (pollution) for the environment and partaking of drugs and alcohol causes negative externalities through extra burden on healthcare, Criminal Justice systems, crime increase and families and friends distress etc.

So just why do the government have to intervene? Continuing the topic of externalities, undesirable negative effects incurred through production must be regulated. Think of a factory who produces toxic waste as a by-product of what they are producing, if there were no laws to regulate the disposal of this waste, then the companies would not do this themselves as it would lower their profits.

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Private costs to firms (land, labour and capital) is the firm’s priority costs and social costs are not an issue for them unless they are promoting something environmentally friendly, healthy option etc.

Other negative social costs include domestic violence, drink driving, vandalism to name a few are seen as societies’ problems and not the companies. There are positive externalities as well as negative ones where both the production and consumption of something are positive. A good example of this would be vaccination programs; this whole process is all about preventing disease.

In a free market economy any company which has ...

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