Inefficiency in the allocation of resources and inequity are the main causes of market failure. Market failure is the situation where, in a given market, the quantity of a product demanded by consumers is not equal to the quantity supplied by producers and occurs whenever the price mechanism fails to allocate resources efficiently and equitably and usually the government needs to take actions and provide a non-market mechanism to allocate scarce resources. Also, inefficiency in allocation of resources basically means the inability to achieve allocative efficiency and productive efficiency. Allocative efficiency means the economy is producing the right amount of the right goods while productive efficiency means producing a maximum output with a minimum quantity of resources or if a given output is produced at the lowest possible total cost. On the other hand, inequity refers to the unequal, unfair distribution of income and wealth, and both factors give rise to market failure.
Firstly, a feature of the efficient market is that the total surplus is maximised, in other words, the social benefits are as large as possible. In addition, the allocative efficiency is when the price in the market is equal to the marginal cost of production, thus the sum of consumer and producer surplus in each market is maximised. Under conditions of perfect competition and no externalities, the supply curve in a competitive market depicts the marginal cost of production. However, this is generally not true in other types of markets where the price is usually above the marginal cost, thus contributing to inefficiency in the allocation of resources, and hence market failure as the total surplus is not maximised.
Next, competitive markets often give rise to the efficient allocation of resources. However, problems which contribute to inefficiency in the allocation of resources or market failure may appear. This welfare loss to the society is known as deadweight loss. For example, a sales tax drives a wedge between the consumer price and the producer price and decreasing the equilibrium quantity sold, resulting in deadweight loss.
Furthermore, externalities are also a main cause of market failure. Externalities are cost or benefit that affects someone not directly involved in the production or consumption of a good, and which occurs without compensation, often referred to as the third party effects. There are basically two types of externalities – the external cost and external benefit. The external cost refers to the cost of production or consumption borne by people other than the producers or consumers, such as education; while the external benefit refers to the benefit from production or consumption experienced by people other than producers or consumers. In the latter, the private market is manufacturing very few of the goods, and subsidies should be put in place in order to boost the socially highest level of output.
Lastly, the market may experience inefficiency in the allocation of resources or fail to allocate wealth in a just and unbiased way, leading to inequity. Inequity refers to an allocation of resources that is considered to be unfair and unjust. Many a times, the most efficient result does not seem especially fair, and the fairest result is not especially efficient. For example, people do not have the same opportunity to accumulate wealth. They can become wealthy through high income and savings. However, the main reason for people’s wealth is inheritance, thus this shows that there is a very uneven distribution of income and wealth, thus giving rise to market failure due to inequity.
In conclusion, inefficiency in the allocation of resources and inequity are the major factors of market failure as they lead to both the biased allocation of wealth and income and also the presence of externalities which involves a third party to bear the cost of production or consumption.
~Wan Ying (13) ;D
Firstly, a feature of the efficient market is that the total surplus is maximised, in other words, the social benefits are as large as possible. In addition, the allocative efficiency is when the price in the market is equal to the marginal cost of production, thus the sum of consumer and producer surplus in each market is maximised. Under conditions of perfect competition and no externalities, the supply curve in a competitive market depicts the marginal cost of production. However, this is generally not true in other types of markets where the price is usually above the marginal cost, thus contributing to inefficiency in the allocation of resources, and hence market failure as the total surplus is not maximised.
Next, competitive markets often give rise to the efficient allocation of resources. However, problems which contribute to inefficiency in the allocation of resources or market failure may appear. This welfare loss to the society is known as deadweight loss. For example, a sales tax drives a wedge between the consumer price and the producer price and decreasing the equilibrium quantity sold, resulting in deadweight loss.
Furthermore, externalities are also a main cause of market failure. Externalities are cost or benefit that affects someone not directly involved in the production or consumption of a good, and which occurs without compensation, often referred to as the third party effects. There are basically two types of externalities – the external cost and external benefit. The external cost refers to the cost of production or consumption borne by people other than the producers or consumers, such as education; while the external benefit refers to the benefit from production or consumption experienced by people other than producers or consumers. In the latter, the private market is manufacturing very few of the goods, and subsidies should be put in place in order to boost the socially highest level of output.
Lastly, the market may experience inefficiency in the allocation of resources or fail to allocate wealth in a just and unbiased way, leading to inequity. Inequity refers to an allocation of resources that is considered to be unfair and unjust. Many a times, the most efficient result does not seem especially fair, and the fairest result is not especially efficient. For example, people do not have the same opportunity to accumulate wealth. They can become wealthy through high income and savings. However, the main reason for people’s wealth is inheritance, thus this shows that there is a very uneven distribution of income and wealth, thus giving rise to market failure due to inequity.
In conclusion, inefficiency in the allocation of resources and inequity are the major factors of market failure as they lead to both the biased allocation of wealth and income and also the presence of externalities which involves a third party to bear the cost of production or consumption.
~Wan Ying (13) ;D
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ReplyDelete"For example, a sales tax drives a wedge between the consumer price and the producer price and decreasing the equilibrium quantity sold, resulting in deadweight loss." - not necessary to introduce this new idea of taxation causing deadweight loss because taxation is a form of government intervention, not due to imperfect market structure.
ReplyDelete-Ms Chen