Definition: Market failure occurs whenever markets fail to deliver an efficient allocation of resources and the result is a loss of economic and social welfare. Market failure exists when the competitive outcome of markets is not satisfactory from the point of view of society. What is satisfactory nearly always involves value judgments.
Market Failure of Inequality and Poverty
Why is inequality and poverty a market failure?
In a market economy an individual’s ability to consume goods & services depends upon his/her income or other resources such as savings An unequal distribution of income and wealth may result in an unsatisfactory allocation of resources and can also lead to alienation and encourage crime with negative consequences for the rest of society The free-market system will not always respond to the needs and wants of people with insufficient economic votes to have any impact on market demand. What matters in a market based system is your effective demand for goods and services. Examples of inequality/poverty:
The distribution of income in the UK.
In 2008/09, income before taxes and benefits of the top fifth of households in the UK was £73,800 per year on average compared with £5,000 for the bottom fifth, a ratio of 15 to one. After taking account of taxes and benefits, the gap between the top and the bottom fifth was reduced with average income of £53,900 per year and £13,600, respectively, a ratio of four to one. This shows that the tax and benefits system works in a progressive way to reduce the scale of income inequality. In the UK, the share of total income earned by the top 1% income earners rose from 6% in 1975 to 14% in 2005 The gap between lowest and higher income groups can be seen in this chart below:
Another way of showing this income data is in the table below – this shows the distribution of disposable income by household income quintile. The data is for 2008-09.
Please join StudyMode to read the full document