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Write a summary that discusses the sources of market failure and how they that can be addressed.
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The text discusses the sources of market failure and how they can be addressed. It notes that market failures can occur due to unfair market practices being adopted by different players in the segments, or due to public goods. It concludes by saying that choice has to be made in regard to imperfect government outcomes and imperfect market outcomes.
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Give me essay based on the summary above.
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#Sources of Market Failure Essay
Market failure refers to a situation in economics whereby there is inefficiency in the allocation of goods and services in a free market economy and is seen as a situation that entails unsatisfactory outcomes for the economy as a whole due to the pursuit of self-motivated interests by individuals and companies. Often the intervention by governments in free-market economies in influencing the trend of market forces is the result of such outcomes in the economy, and economists use different theories in the analysis of the cause for the market failure in attempts to bring out corrective measures as and when such situations arise. These strategies work in situations where public policy plays an important role and decisions are taken in this regard to managing the market forces. However in implementing these strategies by the government, whereby interventions are used such as subsidies, taxes, price and wage controls, regulations, and bailouts, may result in the inefficient allocation of resources thus triggering the failure of the government in managing the markets. It is in this context that choice has to be made in regard to imperfect government outcomes and imperfect market outcomes. It is a common belief that market failures occur because there are inefficient mainstream outcomes that justify intervention by the government by way of the several tools at its disposal in influencing the flow of the economy (Sara Connolly & Alistair Munro, 2005).
There are several sources of market failure which primarily occur due to reasons related to unfair market practices being adopted by different players in the segments. Firstly market agents assume the power of the market which gives them leverage in preventing mutually beneficial profit from reaching other traders, which results in inefficient market conditions due to the conditions of imperfect competition created by such tactics. Such practices are of various forms such as cartels, monopolies, and monopolistic competition. The second source of a market failure relates to public goods whereby certain goods are in the nature of being unrivaled by others and cannot be excluded in terms of their being no substitute for them. Examples of such goods and services relate to police, defense, public health, and medical care. Externalities often influence market conditions and lead to failures due to initiatives taken by individuals and companies, which may not affect other firms directly but there is a reflection of such actions on them by way of conditions such as road congestion, pollution, and intellectual property. Often there is asymmetric information and imperfect information so that buyers and sellers do not have adequate information relating to extent of risk involved, or there are circumstances whereby the concerned parties have different levels of information, which creates an imbalance in disturbing the market performance. This kind of problem is faced in activities such as legal services, insurance, secondhand cars ,and dentistry. The tendency of increasing returns working to decrease costs with the increase in output results in market failures, which primarily occur due to natural monopolies which have to be checked by regulating private monopolies, public ownership and structural separation. When a single or a few sellers or buyers have immense power in the market to influence and manipulate the price of goods and services, they are said to have the market power in disturbing the normal functioning of the market. This situation arises mostly when individuals and companies form cartels or when there are monopolies in the purchase pattern of such individuals and groups. This shortcoming is normally removed by introducing competitive tendering and bidding, regulations, mergers, and removing market barriers. Conditions of an imperfect market are said to exist when the markets are unable to achieve desired results due to market failure, and over and above such an economic situation, the government does not take remedial measures to introduce regulations to rectify the shortcomings. It is quite evident in the real world that there is more prevalence of imperfect markets, which is considered to be a lesser evil. An imperfect market is also characterized by situations in which the public and companies do not get the desired access to financial instruments which may result in disruption of production plans.
Market failure has justified the governments in using public policy and look at market failure as a consistent problem of unregulated markets. This is a justified means for the intervention of the state in the economy to bring about social justice and efficiency in order to ensure that there are no inequalities in income and wealth levels. However, the economists in the government have to use their expertise to see that the most effective theoretical means are used within the regulatory provisions to bring about such outcomes.
Practically, market failure implies the occurrence of a number of adverse economical circumstances that arise due to a combination of the sources of market failure working to disrupt the normal functioning of the market. Market failure is the result of an unequal distribution of wealth and the belief that public goods or public services such as utilities, schools, roads and operas would not be available in free markets. There are those that wish to enjoy all services by not paying for them who add to the burden on the economy. Often resources are utilized for producing goods that are not of much utility such as junk foods and trashy movies which deprive the productive activities for superior goods that are often ignored. Market failure is also related to an overall situation of inefficiency whereby economic goods and services are not produced in keeping with human desires and aspirations.
Efficiencies of perfect competition are essential to emanate in view of the fact that resources are scarce and consequently there has to be optimum utilization of these resources for production and distribution. An outcome in productive activities is considered to be efficient if the quantity produced by firms and then bought by consumers is efficient economically provided the sum of consumer and producer surpluses are maximized. Theoretically, if a productive outcome is not efficient then there is always a possibility for some company or individual to some company or individual canfected. Such efficiencies are different and circumstances depending upon the economic conditions prevailing at the time. Productive efficiency occurs due to the maximum production of goods and services with the given resources by way of inputs. This has to essentially occur on the frontier of production possibilities and the curve, more goods can only be produced by producing fewer services. Efficiency of production also occurs on the lowest points of the average cost curve of the company. An integral trait of productive efficiency implies that market output is produced at the least prices and there is the free entry of firms in perfect competition and that such entry is attractive until all profits are completely wiped out. The fact remains that most real markets in the world violate at least some conditions of a perfect market thus providing that no one market is completely efficient. Allocative efficiency occurs with the distribution of goods and services as per consumer preferences and an economy could be efficient by way of the number of goods and services produced, but if the people do not use them, then there is allocative inefficiency. X inefficiency occurs when companies have no desire to cut cost of the product due to monopolies that enable extra profits and hence there is no motivation to reduce the surplus workforce which in turn leads to a higher cost of production. Hence in monopolies the market output is much below the efficiency levels (Louis Makowski et al, 1995).
Efficiencies of scale refer to situations when firms and companies produce goods and services at the lowest possible long run average costs thereby benefiting fully from the economies of scale. Dynamic efficiency requires companies to keep pace with technological developments so that they are able to provide technologically advanced products in keeping with the competition in the segment along with the reduced cost per unit. It is therefore important for companies to constantly keep updating on the technological developments so as to provide maximum utility and value to the customer just as other firms in a perfect competition situation would have to do. Social efficiency implies the consideration of externalities so that the social cost of production equals the social benefit occurring from the productive activities. When factor inputs used in the production of goods and services are related to the efficiency in production technical efficiency is said to operate for the benefit of manufacturers.