Economics – outcome
Market failure is ultimately defined by when a market is unable to allocate the resources it has effectively. The two main reasons that a market fails is down to productive inefficiency and allocation inefficiency. Productive inefficiency can be described as when companies are not making the most of the inputs they receive. The output that has been lost due to this could have been used more wisely to satisfy consumer wants and needs. Allocation inefficiency is when resources are not allocated correctly and could have been to better use elsewhere which would satisfy more wants and needs.
However there are other reasons why the market can fail on a more common level, these being things like external factors, for example pollution. Imperfection markets are likely to fail also as markets are unable to make profits from producing public and demerit goods, this can therefore often result in market dominance. Factors which must be met in order for a market to run are that the producers must be compliant with the changes in demand and be able to respond to these hinges. Additionally, the cost to make product or services and the price of these must reflect the social costs and benefits.
These factors of production must run efficiently. Public goods are goods which are non-rival and non-clubbable which means that the amount of the good consumed by one person does not exclude the amount another person is entitled to and can consume. Furthermore, it also means that once the good is made available, it is impossible to stop others use of it, for example, street lighting. Subsequently, these goods will never be provided by markets as the impasses who are seeking to make a profit and would not invest as they cannot collect the revenue needed to supply these public goods.
Consequently, there is allocation inefficiency as markets are incapable of attracting supply to necessary services, like policing. Merit goods are goods and services which could be provided by the market but often aren’t as consumers may not be able to afford them. An example includes education which is provided by the government and also the private sector as not everyone feels the need to buy education when it is already provided for free. Market failure is often caused when externalities are unaccounted for throughout the production of something.
As a result, producers and consumers fail to recognize the effect on third parties that may occur. Two types of externalities include positive and negative. Negative externalities consist of third parties costs, created by outputs production or consumption, for example, pollution which is caused by factories who release toxic gases into the air, creating holes in the o-zone layer, effectively creating problems for the environment. The second externalities, positive, is when third parties infinite from the production or consumption of something, an example is education and training.
If a person is educated and trained well, a future employer may benefit from this and expand their skills by offering further training or education. Imperfect competition is ultimately created by the existence of monopolies and Economics – outcome 3 By charitableness companies and a monopoly market is when the market only exists due to a specific business. Correspondingly, the consequence of markets being monopolies and oligopolies can lead to price fixing and rigging of markets, therefore the government intervenes to prevent this. 2.
The Competition Act 1998 is a current government policy on competition provides an up to date framework on how to identify and deal with business who abuse their position as dominator in a market. The reason this act came into place was to ensure the I-J policy worked smoothly with the EX. Competition policy. Moreover, it consists of two parts including firstly, prohibiting businesses making agreements that restrict, distort or prevent competition to an appreciable extent within the I-J and secondly, orbiting businesses in a dominant position abusing their power.
The instrument used to achieve the Competition Act 1998 is the Office of Fair Trade (OFT). Furthermore, the Office of Fair Trade was created by the Fair Trading Act of 1973. This is where the government office collects information on trading customs and acts as a regulator in the market place and it is the Office of Fair Trades Job to ensure markets work well for its consumers. The market works well when businesses are in open, reasonable and dynamic competition with each other for the consumer.
The OFT attempts to ensure that consumers have as much choice as possible across all the different sectors of the marketplace, as this give them genuine and enduring power. Consequently, due to the OFT being an independent professional organization, they act as a leading role in promoting and protecting consumer interest through the I-J, while certifying that businesses are fair and competitive. The Competition Act 1998 has been a success within the I-J, due to its restrictions on unfair competition it has seen many companies punished for abusing this act.
The CT has allowed companies within the I-J to remain competitive, with prices at a reasonable amount which without this act may have seen the prices rise considerably. New businesses have found it much easier to come into the market due to this act as it allows them to price at a competitive rate, where established firms cannot price them out of the market. This allows the new business to establish a new client base; this in turn increases the competition within the market which allows the market to remain in a healthy state due to the constant battle for a strong market share.