Question

List 5 conditions that are required to make the statement that private markets are the best way to allocate scarce resources, where best implies, they maximize total surplus to society. For each give an example of a product that fails that condition and thus there is a market failure.

Answer 1

1.There is no negative externality :

Supose there is a private company producing steel. If the private market of steel itself allocate resources. The production steel would create a negative externality on people in the localities situated nearby. The amount of pollution coming from the steel production will affect the health of citizens situated nearby like vomiting lumg cancer etc. Thus the market of steel prpduction does not allocate e resources efficiently ,thus the total surplus is not maximised.

2.There is no postive externality :The private market of education creating positive externalities on students. Making them informed individuals like informed voters .High informed voters will choose deservong candidates ,makr more prosperous economy. Thus the scarce resources used in education will inefficiently producee the outcome.

2.There is no market power such as monopoly.: If there is only one producer of the steel.The market of steel will produce inefficiently as the sole producer of steel will charge higher prices and less output compare to the market for perfect competition. The consumer surplus will decline and thus the market will not maximise the total surplus which is both consumer and producer surplus.

3.There is no perfect imperfection . If there is no perfect information the private market can not produce efficiently. Suppose any party of the market say buyer has no  information about sellers.The market can not allocate the resources inefficiently.

4.There is no regulation if the market is regulated by government then the market will produce lesser of goods and thus the producer surplus declines and thus the total surplus of the market is not maximized.

5 .There is no trasaction cost. If there is high transaction cost like transportation cost. The market fails to allocate efficiently. Higher transaction cost reduces the producer and consjmer surplus ,thus the total welfare of the economy.