In: Economics
Market failure is defined as “the inability of a market to produce a desirable product or produce it in the “right amount.” Explain how may this happen and what will be the likely impact of such occurrence. Give two examples resulting in overproduction or underproduction. For each case give what may be considered as intervention in the market for its correction as “second best.”
Market failure is market left on its own fail to allocate
resources efficiently; without the intervention of government. This
leads economic inefficiency. For example, government introduce
subsidies to have enough goods and services, this is a market
failure where demand still exists but supply is no longer limited.
Negative externalities are the causes of market failure. The
effects of production and consumption are not directly reflected in
the market. Consider the over production of gasoline. This leads a
negative externality because people who do not used in the car. The
over production of the gasoline increase the cost of air pollution.
This will negatively affect the climate and the health of the
people. The overall social cost of this becomes the summation of
private cost of the firm and the external cost of bystanders affect
this pollution.
Government policies like price floor, price control and price
ceiling are the effective measures for this market failure. The
implementation of ceiling price will make the withdrawal of sellers
from the market. This lowering price will attract the consumer’s
demand. To maintain efficiency sometimes government merge this
price ceiling with the rationing. The consumers are willing to find
the second best good in the market other than gasoline. This will
increase economic efficiency and market stability.