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MARKET FAILURE (features of an efficient market (1) No market dominance,…
MARKET FAILURE
Market Dominance
Monopolists or oligopolists can abuse their market power to raise the price of a product such that allocative inefficiency occurs as price is not equal to marginal cost.
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2) Hence monopolies are able to produce additional units of the good when the marginal benefit exceeds the marginal costs. Thus, society will be better off if an additional good is produced.
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Imperfect Information
Brings about mis-allocation of resources, often ending up with under- or over- allocation as perceived benefits are lower or high than actual benefits
Causes
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5) Asymmetric information between buyers and sellers, where buyers or sellers have better information than the other.
Externalities
Positive Externalities
Benefits from production or consumption experienced by society but not producers or consumers themselves and are not accounted for by the price mechanism.
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1) Assuming MEC=0, MSC=MPC
2) Market equilibrium occurs at MPB=MPC , producing at Q.
3) However, since positive externalities exists, MEB>0, MSB>MPB.
4) Market equilibrium occurs at MSB=MSC, producing at Qs.
5) Since Q<Qs, there is an underproduction between Qs and Q.
6) Hence, market failure occurs under market forces with the under-allocation of resources in the consumption of healthcare.
Negative Externalities
Costs from production or consumption experienced by society but not producers or consumers themselves, not accounted for by the price mechanism.
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1) Assuming MEB=0, MSB=MPB.
2) Market equilibrium occurs at MPB=MPC, producing at Q.
3) Since negative externalities exists, MEC>0 , MSC>MPC.
4) Socially optimal equilibrium occurs at MSB=MSC, producing at Qs.
5) Since Q>Qs, there is an overproduction between Q and Qs.
6) Hence, market failure occurs under market forces with the over-allocation of resources in the production of steel.
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Public Goods
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Non-rivalrous in consumption ; Consumption of the good by additional individuals does not prevent others from enjoying the same good or reduce its quantity left for others
Therefore, marginal cost-0 and there is no price signal and no goods are produced, resulting in a "missing market".
Income Inequity
Causes
1) Differences in wages, especially that between a low-skilled worker and a highly-skilled one.
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Market system does not respond to the demand of those with insufficient money and hence there is no distributive efficiency as goods and services do not go to those who need them the most.
definition : Occurs when free markets, operating without any government intervention, fail to allocate scarce resources efficiently to maximize society's welfare.
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