Question

According to Cunningham (2011: 28-29), there are serious consequences for market failure by a nation, and particularly in a small and endowed country like Sierra Leone. Discuss 5 of those consequences that can arise due to market failure.                                                            

Answer 1

Small and endowed countries typically face serious consequences due to the fact that these countries lack proper institutions or market competitiveness.

The five main consequences that can arise due to market failure according to Cunningham are-

1. Uncompetitive situation - The dominant players such as firms in Monopoly or oligopolies exert their market power to charge high prices to customers which could have otherwise sold at a cheaper rate and makes the entry of new players difficult which makes competition in the market impossible.
2. Generates low level equilibrium- Often the disconnected markets in small rural areas generate low income due to low income capacity, little or no technological advancement or innovations, which often leads the smaller markets into poverty. Interconnected markets also ofetn affect the small firms or business owners when the market fails due to their lower resouces - labor and capital available.
3. Generates sub-optimal delivery of investments - In case of high risk investments, the delivery of investments becomes sub-optiman due to the fact that firms speculate less or no profits which leads to disinvestment in the economy.
4. Creates barriers to entry - The monopolies create barriers to entry for new entrants by exerting their market power, leading to high prices and low service quality.
5. Negative social welfare - Market failure hinders the growth process of a developing country, thus making it socially worse off by increasing poverty as the production process decreases. Even the government who intervenes to make things better performs poorly and the economy faces a negative welfare.