Market Failures
- Created by: Rima Fandi
- Created on: 07-12-24 22:41
Keep in my mind that market failures come from breaking any of such assumptions:
1- Many buyers and sellers
2- Perfect information
3- No barriers to entry or exit
4- Firms are maximising their profits
5- Consumers are maximising their benefits or utility
If those assumptions are hold then we have an allocative efficiency where there is:
1- Maximisation of society surplus ( it is the sum of consumer and producer surplus)
2- Maximaisation of Net social benefit (We are not producing more or less QUANTITY over the equilirium point, as more will lead to the social cost higher than the social benefit so there will reduced social benefit, and if we produce less quantities, then social benefit will not be fulfilled and we might be losing out on potential NET SOCIAL BENEFIT (make sure you keep prducing till the market equilibrium to keep adding benefit more than cost)
there for at equilibrium where MSC equals MSB, we are maximising NET SOCIAL BENEFIT
3- Resources perfectly follow consumers demand (No surplus and No exccess supply) and (there are no shortages and no excess demand)
The market or the private optimum equilibrium occurs when MPC "Marginal Personal Cost" = MSC "Marginal Social Cost", and if any of the assumptions break down then there will be a difference between the private optimum and the social optimum where MPB = MSC
When there is a difference between the private optimum and the social optimum, here we can see that there is no allocative efficiency, and the error in the maximisation of social benefit
In a free market, we assume that there is no external cost or benefit so this is why MSB = MPB and MPC = MSB
So Market Failure occurs when the FREE MARKET fails to allocate scarce resources at the socially optimum level of output
1) Negative and Positive externalities (negative or positive impact on third parties as a result of production or consumption)(when conumers and firms ignore any impacts on third parties when they consume or produce which is normal because consumers are trying to maximise their utility and producers are trying to maximise their benefit) ------> self-interest (the heart of the problem)
2) De-Merit goods (worst for us than we think) or merit goods (better for us than what we think)(we do not know how good or bad those are for us because there is imperfect information)(consumers here make irrational decisions when they consume)(which lead to the allocation of scarce resources being too high or too low)-----> Information failure
3) Public Goods: Free rider problem and the notion that the firm is profit motivated and at the end there will be no supply of the public good
4) Common access resources (tragedy of the commons)(products will be overconsumed or overproduced: Negative externality because of self-interest
5) Income inequality can be a source of market failure: (on the grounds of Inequity)
6) Mnopoly power: One dominant seller and high barriers to entry (consumers are exploited with higher than socially…
Comments
No comments have yet been made