Question

What are the 4 types of market failure? Explain each and give an example of each

Answer 1

Market failures arise when the process of voluntary exchange achieves the criterion of allocative efficiency that the value of the goods produced equals the value of the goods not produced.

The four types of market failures are public goods, market control, externalities, and imperfect information.

Public Goods- Public goods are goods that can be consumed simultaneously by a large number of people without being consumed by one that imposes a cost of opportunity on others, which is called nonrival. They are also characterized by the impossibility of excluding nonpayers from consumption. Nonrival consumption means that when given at a zero price, public goods are effectively distributed, which is rarely inclined to do by the markets. In addition, the inability to exempt non-payers contributes to the issue of free-rider, which further prevents the voluntary exchange of public goods across the markets. Common examples of public goods include the standard of national security, public health and the environment. Consumption by one does not impose a cost of opportunity on others in each case and non-payers can not be excluded from the consumption. And markets fail to allocate the production , consumption, or supply efficiently in each case.

Market Control- Market control arises when buyers or sellers exert influence over the price of a good and/or the exchanged quantity. The ability to control the market , particularly the price of the market, prevents a market from equating price of demand with price of supply. Market regulation on the supply side enables sellers to set a market price, the value of the manufactured good, above the value of the unproducted products. An extreme example of supply side market control exists with monopoly, a single-seller market. A less severe but more common example is oligopoly, a market with few major sellers. Common examples of supply-side or demand-side management markets include urban electrical distribution (monopoly), car manufacturing (oligopoly), work in a corporate town (monopsony), and work in professional sports (oligopsony).

Externalities- An externality occurs if the demand price does not include a profit or if the supply price does not include a cost. This means that the production price does not reflect the full value of the product produced or the supply price does not reflect the full value of the products not produced. As such, an efficient allocation does not achieve market equilibrium. A noted example of the externality is pollution. The emission of residuals in the production or consumption of goods imposes cost of opportunity on others that did not involve the exchange of market. In this case, the supply price on the market does not include all manufacturing opportunity costs, the omitted costs are those imposed on other polluters

Imperfection Information- The lack of knowledge between buyers or sellers also means that the demand price does not reflect all the advantages of a good, or that the supply price does not reflect all the cost of production opportunities. That is, buyers may be willing to pay more or less for a good because they don't know the real benefits that it has brought. Or sellers may be more or less able to consider the true opportunity cost of production for a good.