Government Intervention in Market

Topics: Economics, Perfect competition, Microeconomics Pages: 8 (2092 words) Published: December 10, 2010

The Market Structures

The complete economic activities are handled in four different market structures, namely perfect competition, monopolistic competition, oligopoly and monopoly. The nature and degree of competition varies among the all the above-mentioned four markets.

In summarized manner we can describe that as the number of sellers increases, each firms’ ability to charge high prices reduces. If number of buyers increases then buyers practice to purchase the goods at his choice price diminishes. The sellers have to face price competitions if the product is homogeneous and price and non-price competition exist if goods are differentiable. A large number of buyers and sellers make competition perfect. A homogeneous good with a number of sellers put the market in competition but a homogeneous good in a few sellers and a number of buyers leads the competition in another directions and put sellers in relatively good position. The complete knowledge of buyers and sellers regarding market price and goods encourage fair competition on the other hand incomplete knowledge of product, alluring misleading advertisements and forced differentiation of the goods break the pure competition. Production of a good by a particular producer or a few producers put the economy in their hands (monopoly) but if only a few buyers or a union of the buyers is controlling (monopsony) the market then market becomes non-competitive. All of the above there are some peculiar goods, which are non-excludable (can be consumed by any one without paying the cost) and non-rivalrous (no one has exclusive right over its consumption), that are not produced by any profit making companies such as military service to protect the nation.

Market Failure Causes

From the above discussion it is very clear that except perfect competition rest three market structures are not fulfilling the optimal criteria of economy i.e. high over all economic growth, full employment and fair distribution of income among the different parts of the society. The reasons for such market failure or non-attainment of the Pareto optimality (efficiency in exchange/consumption, efficiency in production and overall Pareto efficiency) are as follows:

1. Imperfect Market: Whenever the market is imperfect as under monopoly, monopolistic competition or oligopoly, the perfect market will fail to achieve the Pareto optimal conditions.

2. Externalities: If the prices in a market do not reflect the true marginal costs and/or marginal benefits associated with the goods and services traded in the market then there must be present of some externality. If the productivity of an individual affects the benefits of the others is called the production externalities and if the consumption levels of others affect the welfare of the individuals then consumption externalities occur.

3. Public Goods:Because public goods are non-excludable and non-rivalrous, they are not sold in a free market like private goods. Therefore, they cannot be provided by private firms.

4. Increasing returns to scale:There are increasing return to scale or decreasing costs due to technical externalities that lead to market failure under perfect competition. When there are increasing returns to scale in a perfect competitive market, they lead either to monopoly or to losses.

5. Asymmetric or Incomplete information:In the real world, there is asymmetric or incomplete information due to ignorance and uncertainty on the part of buyers and sellers of goods. Thus they are unable to equate social and private benefits and costs.

Type of Government Intervention

At this stage Government intervention comes into effect and Government try to provide the following benefits:

1. Control non-competitive behavior of the firms.

a. Taxation of monopoly profits (the Windfall Tax)...
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