UNIT -V
MARKET FAILURE
MARKET FAILURE :Market failure occurs
when private transactions result in a socially
inefficient allocation of goods, services &
productive resources.
There are three sources of market failure:Market Power.
Externalities.
 Public goods.
Another source of market failure asymmetric
Information.
Market Power :Consumer & Producer surplus:Consumer surplus is the
difference between what consumers are willing to
pay for a given quantity of a good or service and the
amount they actually pay.
Producer surplus is the difference
between the total revenues earned from the
production and sale of a given quantity of output
and what the firm would have been willing to accept for
the production and sale of that quantity of output.
Externalities :-
An externality is a cost or benefit
resulting from a market transaction that is
imposed upon third parties. These third party
effects are called externalities.
Third parties are positively or negatively
affected by a market transaction. There are two
types:-
1.External Economies or Positive Externalities
in Production.
2.External
Diseconomies
or
Negative
Externalities in Production.
Transaction costs defined as the resources
necessary to transfer, establish & maintain
property rights.
Coase theorem:A market determined solution
to the externality problem. The theorem states that
the assignment of well defined private property
rights will result in a socially efficient allocation of
productive resources and a socially optimal level of
goods & services.
Conceptually it fails for the following reasons:1.Externalities are defined by Transactions Costs.
2.Transaction costs are ubiquitous.
3.Definition problems.
Public Goods :The possession of certain properties that
some goods are called public goods. They are produced
in the public sector or private sector.
Characteristics of public goods are :1.Non-Rivalry in consumption.
2.Non-Excludiability.
3.Free-Rider’s Problem & Public Goods.
4.Public goods & Pareto Efficiency.
Concept of Asymmetric Information:Imperfect information.
2. Asymmetric information.
1.
Equilibrium in a market with asymmetric information:1. Adverse selection.
2. Appraisal.
3. Screening.
Market intervention by Government
1.
2.
3.
4.
Four basic tools in change economic outcomes:Taxation & Subsidies.
Public sector production.
Antitrust Legislation.
Regulation.
Antitrust Legislation:Antitrust legislation
represents government intervention in the
marketplace, such as making it illegal for firms in
an industry to engage in collusive pricing & output
practices, to prevent industry abuse of market
power.
Important pieces of antitrust legislation are:1.Sherman Act 1890.
2.Clayton Act 1914.
3.Robinson-Patman Act 1936.
4.Wheeler-Lea Act 1938.
Regulation :Regulation into two types:1.Economic regulations.
2.Social regulations.
Thank You