Question

Please discuss what market failure is? why does it happen? give some examples. what do you think?

Answer 1

Solution:

Market failure occurs due to misallocation of resources , which results disequilibrium in the market which creates inefficiency in the market .

Reasons for market failure :-

1 Market Control : when there is one or very few buyer or seller in the market they can set whatever price they want to pay for a good as a buyer or charge whatever price they want to set as a seller. For example monopoly firm as a seller and monopsony as a sole buyer.

2 . Externalities:- externalities are of two types :

A positive externalities: it occurs when social benefits exceed the private benefits due to the consumption or production of a good. For example , government provides free vaccine of covid - 19 free to everyone , its benefits are not considered in production cost .

B Negative externalities -it occures when the production or consumption of a good causes social cost to exceed the private cost. For example air pollution caused by industries doesn't take in to account the effects of environmental pollution .

3 . Government Regulations - restrictions imposed by government such as licensing , floor price or price ceiling prevent market forces to work freely. For example minimum wage laws are price floors, employees can not be paid less than fix amount.

4 . Asymmetric information - when one party has proper information that other doesn't have or both parties do not have material information that would affect whether the tread would occur or not, this problem is known as asymmetric information . For example car seller knows more about the car and has incentive to cheat this can lead distortion in the market .

5 . Public Goods - public goods are produced for everyone and one person consuming it can not decrease its availability for others . These cause market failure because people know that theywill get it at free of cost and someone else will pay for it so government stops producing these goods. For example lighthouse or public parks.