Question

Describe the four causes of market failure. and Why is it safe to assume that the government would not allow AT&T and Verizon to merge into a single company.

Answer 1

Soln. Four causes of market failure are listed below -

1. Public goods - Public goods leads to market failures when a section of the population that consumes the goods not able to pay but continue using the good as actual payers. For example, public transport is a public good that every citizen is entitled to enjoy, regardless of whether or not they pay taxes to the government.

2. Externality - Externality is a transactional cost that affects the third party, who is not associated with the benefit and cost of that transaction. It can be both positive and negative. Providing good public education mainly benefits the students, but the benefits of the public good benefits the whole society. This is an example of positive externality. Alike, even though alcohol consumption is harmful to an individual, it also causes a negative health impact on people around that individual. This is the example of negative externality.

3. Market control - Market control happens when price of goods and services are either determined by the buyer or the seller in a market. The power prevents the natural forces of demand and supply from setting the prices of goods in the market. This leads to market failure due to no control over the prices.

4. Lack of accurate information - The lack of information among buyers or sellers often means that the demand price does not reflect all benefits of a good or the supply price does not reflect all opportunity costs of production. This is also one of the reasons of market failure.

It is safe to assume that the government would not allow AT&T and Verizon to merge into a single company as it will lead to monopoly over the telecom line of business and later leads to control of prices by the seller side. This comes into the market control reason of market failure.