Reasons for Market Failure and the Roles of Government
To Improve the Market Outcomes
What is market efficiency? Market efficiency is defined as all participants in a market can get the maximum benefits and used the minimum cost and effect to transact (BusinessDictionary.com, 2011). Besides that, the definition of market efficiency is covered by the market and investor group. In other words, efficiency refers to the productivity or the size of the economics pie. If the size of economics more big, the standard of living of people will be greater. Market efficiency means that there are no externalities, no market power or competitive power and it has the complete information. According to Dothan (2008), “the market efficiency is separate into two parts which are prices fully reflect all available information, and there are no trading strategies that produce positive, expected, risk-adjusted excess returns”. However, it is impossible that the market will always efficiency. This is because there are many issues or effects which contain in the market. According to Mankiw (2007), “Market failure is a situation in which a market left on its own fails to allocate resources efficiently”. Moreover, fail to allocate resources efficiently means that the benefit does not equal to the cost, or the demand does not meet the supply to make an equilibrium point. Furthermore, when a market cannot maximize the surplus available in market, it means that it is market failure. There are many reasons that cause the market fail to allocate resources with reasonable efficiency. One of the reasons is externality. He stated, “Externality which is the impact of one’s person actions on the well-being of a bystander” (Mankiw, 2007). Moreover, when a bystander or an outsider influenced by consumer and producer; therefore, it consider an externality to the market (BasiceEconomics.info, 2011). Bystander means someone is not a producer or consumer and sellers or buyers. There are two types of externalities, that are negative externalities and positive externalities (BasicEconomics.info, 2011). From the name itself we know that negative externalities will bring some bad or harmful consequences to the bystander. For example, when a factory produces car and consumer buy the car from the factory, so the factory can beneficial the consumer. However, the factory released lots of smoke and it caused air pollution. Consequently, it wills harm the peoples who stay near to the factory. In addition, those peoples need to see doctor and pay for the treatment, but the factory is not going to return the money to them. Therefore, the cost of those people paying doctor is an externality to the market, which is the cost does not included in the market price of the product. On the other hand, positive externalities will beneficial the bystander. For example, government provides free vaccination to those students who study in primary and secondary school. It is not only benefit the students who received the injection but also benefit the society. When students received injection it will reduce the percentages of students infect to the disease; hence, society or peoples will have less chance to infecting to the disease. Another reason caused market failure is lack of competition or no competition and it is refer to monopoly firm. According to Mankiw, “A firm is a monopoly if it is the sole seller of its product and if its product does not have close substitutes”. Further explanations of monopoly is when there is only one firm selling one specific product and no other products can be replace to the specific product. One of the examples of monopoly firm in Malaysia is Tenaga Nasional Berhad (TNB), it is main Malaysian energy provider and the only one energy provide in Malaysia. The problems occur in monopoly is consumer having less choice or no choice to choose what they want since there is only one supplier in a country (Davies,...
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