Market failures occur when market forces fail to efficiently allocate resources, resulting in outcomes like shortages, surpluses, high prices, or poor quality goods. There are several types of market failures, including the failure to account for all costs and benefits to society, information failures between producers and consumers, and the under- or over-production of merit and demerit goods due to externalities. Other market failures stem from the characteristics of public goods, abuse of market power, immobility of resources, short-term thinking that ignores long-term investments, and unfair income distributions determined solely by market forces. Government interventions sometimes also fail to correct these market failures.
2. Nature of Market Failure
When market forces fail to produce the products that consumer demand ,in
the right quantity and at the lowest possible cost.
Markets are inefficient
Shortage of SS
Surplus
High Pricing
Poor Quality
Lack of innovation
3. Failure to take In Account all Cost
(ss)and Benefits(dd)
Social Benefit > Private Benefits
Then there will be under-consumed and under production.
The demand is less as compared to the social benefit received.
Social Cost > Private Cost
Then there will be over- consumption of products.
4. Other Reasons of Market Failure
Information Failure
Merit Goods
Demerit Goods
Public Goods
Abuse of Market Power
Immobility of Resources
Short Termism
Unfairness
Government Failure
5. Information Failure
Consumers : Availability of product at low price, offers, nature of the product
and the benefits they can receive from them.
Workers : jobs on offer, location of workplace, qualifications required and
remuneration.
Producers : what products are in demand , good quality of Raw materials can
be purchased at a lowest possible prices ,Cost effective method of
Production.
Any failure by any of these regarding the information will lead to Market
Failure
6. Merit Goods
Products which are more beneficial to the consumers than they themselves
realize and benefits( External benefit) does not depend on direct
consumption are known as Merit Goods
Eg: Health Care, Hospitals, Education
These goods are under consumed and government provides subsidy to the
consumers.
7. Demerit Goods
Products which are harmful to the consumers than they realize and they
generate a external cost are known as demerit goods.
Eg : Cigarettes , Alchocol, Drugs etc…
These goods are over consumed and thus over produced.
8. Public Goods
A product that one individual can consume without reducing its availability to
another individual and from which no one is excluded.
Economists refer to public goods as "non-rivalrous" and "non-excludable".
E.g. :National defense, sewer systems, public parks and basic television and
radio broadcasts could all be considered public goods.
9. Abuse of Market Power
Producers having more market power than the consumers.
Thus the firm may not be allocatively ,productively and dynamically efficient.
Abuse of market Power may also occur when there is more than one firm
producing the product. They may go for PRICE Fixing
10. Immobility of Resources
Movement of resources towards the demand.
Resources must be both occupationally and geographically mobile.
A government provides various grants to improve the mobility of the resource.
Eg: Occupational Mob : improves educationa & providing trainings
Geographical Mob : Investment grants on Land
11. Short Termism
Market forces may not result in sufficient resources being devoted to CAPITAL
GOODS, which may enable to increase Standard of Living by improving quality
of goods.
12. Unfairness
Income distribution can become uneven if it is solely determined by the
market forces.
Thus government gives financial assistance to the poor and essential products
free of cost.
13. Government Failure
A situation where the government intervention worsens the situation instead
of improving.
Due to
Lack of information
More of private benefits