LT 7 (Cohort 12 MBA 2017)

09-22-16
(MARKET FAILURE)
A market failure is a situation where free markets fail to allocate resources efficiently. Markets may fail to
produce and allocate scarce resources in the most efficient way.
CAUSES OF MARKET FAILURE
I.

EXTERNALITIES
o Positive and negative effects of the production and consumption of products that affect the
third party (spill-over).
(Positive) Goods / services which give benefit to a third party, e.g. less congestion
from cycling and education
(Negative) Goods / services which impose cost on a third party, e.g. cancer from
passive smoking and plastic bags

II. MONOPOLY
o When a firm controls the market and can set higher prices. The companies dictate how much
they can supply. Often what they dictate to supply doesnt meet the demand of the
consumers
Electricity
Telecommunication Companies
III. INADEQUATE PROVISION OF GOODS AND SERVICES
o Markets may fail to form, resulting in a failure to meet a need or want, such as the need for
public goods.
Defense
Street lighting
Highways
IV. ASYMMETRIC INFORMATION
o Markets may not provide enough information because, during a market transaction, it may
not be in the interests of one party to provide full information to the other party.
Second-hand Car Market
REMEDIES OF MARKET FAILURE

Tax on Negative Externalities: The shift of burden from the negative externalities into the suppliers
e.g. Petrol tax and Carbon Tax
Subsidy on positive externalities: The government rewards positive incentives (subsidies) e.g.
Subsidy on Education
Laws and Regulations: The government controls market failure through laws and regulations e.g.
Simple and effective ways to regulate demerit goods, like ban on smoking advertising.
CONCLUSION
MARKET FAILURE IS A PART OF THE ECONOMY AND IS A REALITY OF LIFE, BUT IT NEEDS TO BE
MONITORED AND CONTROLLED.