What Is Meant by Market Failure and How Can Government Attempt to Correct It?

Topics: Economics, Externality, Market failure Pages: 4 (1368 words) Published: March 28, 2013
What is meant by market failure and how can government attempt to correct it?

Market failure occurs when there is no economic efficiency within a market. Whereas government intervention is put in use when a market may not always allocate scarce resources efficiently in a way that achieves the highest total social welfare.

Monopolies are one of the main causes of market failure. Monopolies are firms whom have eliminated all, if not, most competitors within that market leaving them with most control within that market. The main reason why monopolies are negative within the economy is because they dictate pricing. After having eliminated most competitors, they then can start to charge whatever price they want for a product as the consumers can’t go elsewhere. As well as having increased the price of a product, they now have caused a limit in choice for the consumer. This is because the consumer can’t go for a cheaper product within that market as the monopoly has gotten rid of competition, thus leaving the consumer with high prices to pay at a limited choice. Another reason is because monopolies only have profit maximisation in mind. Profit maximisation is when a firm determines the price and output level that returns the greatest profit. Although the firm is maximising its profits, monopolies are allocatively inefficient. Monopolies tend to become complacent over time because pricing power, not gains from efficiency or innovation, drive profits. This means that due to the fact that they have stripped consumer surplus and experiencing vast profits, they are simply not allocating resources efficiently simply to do with its size. As a firm gets larger, it is more difficult for managers to be on top of every single thing that occurs within the company. Unnecessary waste could be caused meaning they aren’t allocating the finite resources efficiently, which isn’t beneficial in any economy. Due to a lack of innovation and efficiency, this also causes allocative...
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