Question

An Economic questions relating to market and non-market failure 2 sub questions. Please answer both thank you

1.a)What is a `nonmarket failure?' Charles Wolf Jr describes 9 mechanisms by which government
intervention may be increased in the absence of efficiency-related reasons for doing
so {5 factors governing nonmarket demand and 4 factors governing nonmarket supply).
Which of these mechanisms seem compelling to you? Which seem unconvincing? What
do the 9 mechanisms have to do with nonmarket failures?

b) Identify two types of market failure, give an example of each, and describe how the
coercive power of the state may be used to correct each of them.

Answer 1

The 9 types of market failures are

Productive and allocative inefficiency

Markets may fail to produce and allocate scarce resources in the most efficient way.

Monopoly power

Markets may fail to control the abuses of monopoly power.

Missing markets

Markets may fail to form, resulting in a failure to meet a need or want, such as the need for public goods, such as defence, street lighting, and highways.

Incomplete markets

Markets may fail to produce enough merit goods, such as education and healthcare.

De-merit goods

Markets may also fail to control the manufacture and sale of goods like cigarettes and alcohol, which have less merit than consumers perceive.

Negative externalities

Consumers and producers may fail to take into account the effects of their actions on third-parties, such as car drivers, who may fail to take into account the traffic congestion they create for others. Third-parties are individuals, organisations, or communities indirectly benefiting or suffering as a result of the actions of consumers and producers attempting to pursue their own self interest.

Property rights

Markets work most effectively when consumers and producers are granted the right to own property, but in many cases property rights cannot easily be allocated to certain resources. Failure to assign property rights may limit the ability of markets to form.

Information failure

Markets may not provide enough information because, during a market transaction, it may not be in the interests of one party to provide full information to the other party.

Unstable markets

Sometimes markets become highly unstable, and a stable equilibrium may not be established, such as with certain agricultural markets, foreign exchange, and credit markets. Such volatility may require intervention.

Inequality

Markets may also fail to limit the size of the gap between income earners, the so-called income gap. Market transactions reward consumers and producers with incomes and profits, but these rewards may be concentrated in the hands of a few.