Market Failures

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Market failure happens – a situation in which economic efficiency has not been achieved because of imperfections in the market mechanism. These market failures consists of ; Externalities, public goods, merit goods, business fluctuations, legal system, re distribution of income..as clearly explained below. Business fluctuations are the ups and downs in overall business activity as evidenced by changes in national income, employment and prices. It is normal that a country passes through a recession or expansion. The disadvantage is expansion is inflation because the price of everything increases. The disadvantage in recession is that no one wants to buy and thus many workers become redundant. The government s responsibility is to correct the ups and downs and make the changes smaller. Negatice nd Positive externalities can be a market failure. Negative externalities lead to an over allocation of resources to a specific ecomic activity. Some of the costs of production have spilled over to third parties, that is parties other than the buyer and the seller of the product. Ex: the third party has to deal with the pollution, noise pollution and accidents of the cars. The gov imports a tax on the producer and the customer, or regulates the market. Another market failure are public goods. These are products or services that the public sector offers to consumers as the considers them important. They can be jointlconsumed by many indiciduals simultaneously at no additional cost. Ex: street lightning. And economic problem of public goods is wastage. The market system cannot deal effectively with the spill over effects of many economic activites ad
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