Market Failure

Topics: Economics, Market failure, Electricity generation Pages: 2 (608 words) Published: January 11, 2011
Economists have identified four main causes of market failure: The abuse of market power, which can occur whenever a single buyer or seller can exert significant influence over prices or output. Externalities- when the market does not take into account the impact of an economic activity on outsiders. For example, the market may ignore the costs imposed on outsiders by a firm polluting the environment. Public goods such as national defence. How much defence would be provided if it were left to the market? Where there is incomplete or asymmetric information

A monopoly is natural if one firm can produce a given set of goods or services at lower cost than can any other number of firms. A natural monopoly results when costs are decreasing in the scale of a firm (economies of scale). In natural monopoly situations the monopolists will raise his costs and tariffs because he lacks incentives for efficiency and is interested in the maximization of profit. A single firm can meet market demand at a lower cost than two or more competing firms could.

Economies of scale are frequently cited as a reason for natural monopoly. In some industries, the fixed costs of initial entry or set-up are so large relative to operational costs that average cost declines over a substantial volume of output. In extreme cases, a firm may not reach the lowest average cost point in its cost function until the available market demand is exhausted. In markets with these characteristics, a single supplier is actually the most efficient form of organization (unlike other monopolies that arise for legal or other reasons). Public utilities and telecommunications carriers have long been viewed as natural monopolies, but technological change may now be gradually eroding their natural monopoly characteristic. That is because modern technology that relies increasingly on fast computers and software is making plant and equipment more modular and scalable than in the past, and is...
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