Saturday, July 13, 2013

ouch! the market failed?

a former student asked me... what's market failure? i say, it's just around...i may have laughed answering it but it's true...market failure is a concept (within economic theory) describing that situation when the allocation of goods and services by a free market is not efficient. by 'not efficient', i meant, there exists another possible or conceivable outcome where a market participant may be made better-off without making someone else worse-off... it may be viewed as scenarios where an individuals' pursuit of self-interest leads to results that are not efficient – that can be improved upon from the societal point-of-view...

then he asked, what are the sources of market failure?... i say there are many but to name some we can start with (1)  public goods --- a public good is one, which if provided to one consumer, is freely available to all consumers like the street lights, parks and roads. this means no private firm is able to make a profit from providing such goods.  hence, government should ensure that such goods are provided at the socially desired level. another is (2) income distribution --- the market does not ensure equitable distribution of incomes. this may motivate government to put in place some policies to redistribute wealth through measures like income taxes.

then there's (3) monopoly --- the operations of monopoly (or natural monopoly) more often than not result in misuse of market power (inefficient allocation of resources too which reduce community welfare). here, at times, governments regulate monopoly and enforce laws preventing cartels. then the most famous (for those with background in economics) (4) externalities --- an externality arises when an activity confers a benefit (like the benefit of research or vaccine) or imposes a cost (pollution) on a third party, without the cost or benefit being included in the market price of that activity...

and saving for last is the most common (5) information asymmetries ---supposedly, buyers and sellers in a competitive market have complete knowledge about a product or service characteristics and quality but this is not always true in the real world... information asymmetries between producers and consumers can lead to market failure and reduce community welfare.. this is the part when WHAT YOU DO NOT KNOW WON'T HURT YOU doesn't work... 'coz believe me, it does!

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