Case Study

Market Failure Analysis

During the last century, the superiority of market economy has been gradually accepted by professional economists, as they have proven that the ideal market economy, in other words, perfect competition, will lead to an efficient allocation of scarce productive resources,1 (Jackson, McIver & Bajada 2007, p.143) with which economics is exactly concerned.   However, practically, imperfect markets exist in a large proportion of real economic situations and result in allocating resources with an unreasonable efficiency, which introduces the concept of ‘market failure’. A market will fail under certain circumstances and it is essential to find out the causes in order to remedy the failure.   Therefore, market failure analysis is regarded as an important tool used to formulate government policies and determine whether regulatory intervention will improve market efficiency.
    As a first step of introducing the whole concept refers to market failure, it is to inquire in more depth into the meaning of it.   This economic term is used to describe the failure of market economy to achieve an optimum, or efficient allocation of resources, to say, market is allocatively inefficient.2   (Lipsey & Chrystal 2004, p.320)
Economists recognise that there are several significant circumstances under which markets failure occurs.   Four cases will be briefly explained here as the main sources of market inefficiency, involving:
  * Externalities (pollution)
  * Public Goods and services (Defence)
  * Natural Monopoly (Mining industry)
  * Asymmetric Information (Flea market)
An externality refers to a cost or benefit arising from an economic activity that flow onto unwitting third parties.   Specifically, externalities indicate the difference between private benefits/costs and social benefits/costs that leads to over or under allocation of resources.   (Lipsey & Chrystal 2004, p.327)
Public goods and services can result in the free-rider... [continues]

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