Market Failure and Government Policies

Topics: Externality, Market failure, Supply and demand Pages: 4 (965 words) Published: November 15, 2011
Market failure and Government policies

A case in which prices are unable to adequately adjust to reflect changes in supply or demand. Market failure may occur due to unexpected disruptive events such as wars or natural disaster, or due to economic barriers such as trade restriction or monopolies. Market failure occurs when freely-functioning markets, fail to deliver an efficient allocation of resources. The result is a loss of economic and social welfare. Market failure exists when the competitive outcome of markets is not efficient from the point of view of society as a whole. This is usually because the benefits that the free-market confers on individuals or businesses carrying out a particular activity diverge from the benefits to society as a whole. An economic term that encompasses a situation where, in any given market, the quantity of a product demanded by consumers does not equate to the quantity supplied by suppliers. This is a direct result of a lack of certain economically ideal factors, which prevents equilibrium.

Types of market failure
1.Externalities (positive and negative)
2.Merit and De merit goods
3.Public Goods
4.Monopoly Power
6.Factor Immobility

Reason of Market Failure

An externality is an effect of a purchase or use decision by one set of parties on others who did not have a choice and whose interests were not taken into account.

Negative externalities (e.g. the effects of environmental pollution) causing the social cost of production to exceed the private cost. Ex. pollution, generated by some productive enterprise, and affecting others who had no choice and were probably not taken into account.

Positive (or beneficial) externalities (e.g. the provision of education and health care) causing the social benefit of consumption to exceed the private benefit. For instance, each infected person who takes drugs eliminate diseases helps all of society, not just the Drug...
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