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Market Failure - Coggle Diagram
Market Failure
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Inequity
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Solution - Minimum wage
Wage floor for bottom earners, reducing income gap
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Immobility of FOPs
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Geographical immobility
Leads to unemployment --- represents a loss of output, thus a waste of resources, and thus resulting in market failure.
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Solution for geographical immobility - Bring workers to work (better infrastructure and transport system) or work to workers (encourage regional business hubs and incentivise businesses to move to less economically connected regions.
Solution of immobility of capital - Incentives for investment in new capital goods or attract businesses to relocate
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Lack of compliance, funds may be misused
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Market Dominance
When the market structure departs from perfect competition. If barriers to entry become stronger, the firm has stronger market power, thus market dominance would result, allowing the firm to possess greater price setting ability, thus leading to allocative or productive inefficiency.
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Solution - Price Regulations: Marginal Cost (MC) pricing - force monopoly to charge price equal to marginal cost
Information Failure
Imperfect Information
Incorrect Information - consumers have received wrong information from sellers (overestimate true marginal private benefit)
Ignorance - consumers are ignorant of benefits brought by product (underestimate true marginal private benefit)
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Solution - Education and Moral Suasion: An appeal to morality in order to influence or change behaviour
Limitations - it is a long term solution, long-drawn process that involves changing mindsets. for addicts, they might not change their minds even when provided with full, complete info.
Asymmetric Information
Adverse selection
When profit-seeking seller knows more about the good sold than the buyer.
As a result, buyer runs risk of being sold good of low quality.
This results in good products and good consumers being under-represented, while bad products and bad consumers are over-represented.
Moral Hazard
A situation in which economic agents take greater risks than they normally would, because the costs that result would not solely be borne by themselves.
This riskier behaviour increases social cost and use of scarce resources, leading to a misallocation of resources and hence market failure.
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