Lecture 11

Market Failure and Government

Intervention
• In recent lectures, we briefly covered market failure.
• A situation where resources are not allocated efficiently, leading to
welfare loss.
• Externalities, provision of public and merit goods, and imperfect
information are causes for market failure.
• In this unit, we look at 3 more causes – lack of competition,
immobility of factors of production, and inequality.
• We will also look at ways the government can correct market failure.
Cause for Market Failure:
Lack of Competition
Lack of competition
• Where the market has only a few buyers or a few sellers.
• A competitive market is where there are many buyers and sellers
selling the same good or service.
• E.g. of a competitive market – Bogyoke Zay selling longgyi.
• E.g. of markets that lack competition:
• Water industry – where there is only 1 company from which
households are forced to buy water.
Lack of competition
• Or, rail transport industry – where
most commuters have no choice
about which company to use on a
particular journey.
• Or, soap powder market in the UK –
where only 2 brands dominate sales.
• Or, the defence industry in the UK –
where the UK government is the
only buyer.
Lack of competition
• Where there lacks competition, firms have every reason to attempt at
charging higher prices in order to make greater profit.
• They will do this by restricting supply to the market, which denies
consumers the ability to buy as much as they would have done if the
market had been competitive.
• And in addition, if trade unions are successful in fighting for higher
wages?
• This entails higher costs for market firms, which lead to firms raising
market prices of goods and services.
• Firms would ‘exert market power’ over consumers.
Cause for Market Failure:
Factor Immobility
Factor immobility
• Where factors of production (e.g. land, labor, capital) are difficult to
transfer from one use to another.
• E.g. a train once built is only useful as a train. It cannot be changed
into a car or plane.
• Or, labour – a coal miner made redundant might only have a few skills
to offer in other types of work – so he/she may find it difficult to get a
job.
• Or housing – it may be possible to find housing at affordable rates in
areas where there is low unemployment, or the worker might not want
to leave family and friends in the local area.
Factor immobility
• The greater the immobility, the more time
it needs for markets to clear when there is
a “shock” to the economic system.
• In the UK today, one major factor causing
labour immobility is the lack of skills of
some in the workforce.
• In Singapore, there is SkillsFuture scheme
– which gives opportunities for workforce
to pick up new skills useful for other kinds
of work should they lose their jobs.
Cause for Market Failure:
Inequality
Inequality
• Where the distribution of income is unacceptable or undesirable.
• Where incomes are low, households are unable to afford basic needs
e.g. food, healthcare.
• Suppose the market provides healthcare. Healthcare will be expensive
and households may not be able to afford.
• In place of market failure, the government intervenes – providing
income in the form of benefits, or goods and services to boost
consumption levels.
Correcting Market Failure:
Government Intervention
1. The government imposes
indirect taxes.
1. The government imposes indirect taxes.
• Suppose there is environmental market failure – firms emit too many
pollutants into the atmosphere.
• This leads to negative externalities in production – bad effects to
society.
• The government steps in to correct market failure by imposing taxes.
• As a result of taxation, costs of production to firms are raised. With
higher costs, firms are inclined to supply less.
1. The government imposes indirect taxes.
• But, how much taxes should the government impose?
• So long as negative externalities can be eliminated.
• Where marginal social cost (MSC) of production = marginal social
benefit (MSB).
• Let’s see how an imposition of a tax can correct market failure next.
1. The government imposes indirect taxes.
• S1 represents the free market supply,
D represents the free market
demand.
• Where S1 meets D i.e. market
equilibrium, PMARKET is F, QMARKET
is A.
• Suppose the government imposes a
tax.
• What does this tax do to firms? This
raises cost of production. Firms
respond by supplying less.
1. The government imposes indirect taxes.
• Supply decreases – S1 to S2.
• Demand remains unchanged.
• How is the tax represented on the
graph? The tax drives a wedge
between S1 and S2, represented by a
vertical distance between these two
supply curves.
• The tax amount is the difference of
the two prices that emerged i.e. G
and E.
1. The government imposes indirect taxes.
• Under this tax, G is the price that
consumers will now have to pay for
the good.
• Under this tax, E is the amount of
money that firms will now get to
keep as revenue.
1. The government imposes indirect taxes.
• An alternative reading of the diagram
may be accorded:
• S1 represents the private cost of
production to firms.
• Where S1 meets D i.e. market
equilibrium, PMARKET is F, QMARKET
is A.
• However, the private cost of
production to firms (MPC) is lower
than social cost of production (MSC).
1. The government imposes indirect taxes.
• S1 does not take into account for
negative externalities.
• Thus, the social cost including
negative externalities is accounted for
by S2.
• Where S2 meets D i.e. social
equilibrium (MSC=MSB), PSOCIAL is
G, QSOCIAL is B. B is the socially
optimal level of provision.
1. The government imposes indirect taxes.
• Hence, to ensure B is achieved, the
government has to (should) impose a
tax per unit of GE on graph –
assuming the government knows the
exact size of tax.
• So, to summarize, taxation could
correct market failure. Firms respond
by supplying less. The output as a
result of decrease in supply, is what
society ideally wants to achieve,
having considered the negative
externalities.
There are however, downsides to taxation.
• 1. Taxes are difficult to target. How much tax should the government
impose?
• Sometimes, taxes are either too high or too small to correct market
failure – largely caused by imperfect information on the part of the
government.
• E.g. the government does not know the exact size of market failure, or
it may underestimate the impact of taxes on the market.
There are however, downsides to taxation.
• 2. Conflict of objectives. On the one hand, the government uses
indirect taxes to raise revenues. On the other hand, the government
wants to correct market failure.
• These two objectives may conflict when decisions are made about the
size of tax to impose.
There are however, downsides to taxation.
• 3. Taxes are unpopular. Especially when policies are met with
opposition.
• E.g. in the 1990s, the UK government was forced to abandon a plan to
raise the rate of VAT on gas and electricity because of political
opposition. It claimed that it wanted to raise the rate of VAT partly to
reduce greenhouse gas emissions.
2. The government provides
subsidies.
2. The government provides subsidies.
• Another way the government could
correct market failure is through
subsidies.
• Subsidies are sums of money
provided by the state to help
industries/businesses keep prices of
goods and services low.
• E.g. with historic colonial
buildings in downtown Yangon.
2. The government provides subsidies.
• As a private developer, would you
take over an old building for
adaptive reuse, considering that
costs of restoration and
maintenance are going to be very
high? Unlikely.
• High costs of production will be
factored into the prices you charge
consumers.
• But what if the government
provides subsidies to help reduce
these costs?
2. The government provides subsidies.
• Let’s see how provision of subsidies
could correct market failure.
• S1 represents the free market supply,
D represents the free market
demand.
• Where S1 meets D i.e. market
equilibrium, PMARKET is G, QMARKET
is A.
• G is the price that firms are charging
consumers – very high – without a
subsidy.
2. The government provides subsidies.
• Suppose the government provides
a subsidy.
• What does this subsidy do? This
reduces cost of production to firms.
They respond by supplying more.
• Supply increases – S1 to S2.
• Demand remains unchanged.
2. The government provides subsidies.
• How is the subsidy represented on
the graph? By the vertical distance
between these two supply curves.
• The subsidy amount is the
difference of G and E.
• E is the price that firms will now
charge consumers – much lower –
with a subsidy.
• Let’s look at an alternative reading
with another diagram.
2. The government provides subsidies.
• We know that should the developer take over the building, there
generates positive externalities in consumption.
• The developer receives private benefit (e.g. taking over as a hotel), and
so will society in receiving social benefit.
• E.g. society can appreciate its interior architecture, or the beautified/
improved surroundings around which the building contributes to.
• That is, social benefit > private benefit.
2. The government provides subsidies.
• Let’s see with a diagram here.
• D represents the free market
demand, S1 represents the free
market supply.
• Where D meets S1 i.e. market
equilibrium, PMARKET is F, QMARKET
is A. A is the output without subsidy.
2. The government provides subsidies.
• However, the social benefit of
consumption (MSB) is greater than
private benefit of consumption
(MPB).
• D1 (MPB) does not take into
account for positive externalities.
• Thus, the social benefit including
positive externalities is accounted
for by D2 (MSB).
2. The government provides subsidies.
• Where D2 meets S i.e. social
equilibrium (MSC=MSB), PSOCIAL
is G, QSOCIAL is B. B is the socially
optimal level of provision.
• Hence, to ensure B is achieved, the
government has to (should) provide
subsidies of GE on graph –
assuming the government knows
how much money to give.
2. The government provides subsidies.
• So, to summarize, subsidies could
correct market failure. Firms
respond by supplying more (from
lower costs of production). The
output as a result of increase in
supply, or increase in demand, is
what society ideally wants to
achieve, having considered the
positive externalities.
Benefits of subsidies
• 1. Output of merit goods can be increased. E.g. government
subsidizes education and healthcare services – which encourages
increase in supply (and of course a lower price that consumers pay).
• 2. Inequalities can be reduced. E.g. government subsidizes price of
essential foods.
• 3. Improving factor mobility. E.g. government subsidizes housing
for employees who wish to move away from areas of high
unemployment. Or to firms who wish to relocate from areas of high
unemployment.
Benefits of subsidies
• 4. Can stir up competition in the market. E.g. government provides
subsidies for new entrants in the market. With competition, prices can
be kept low.
• 5. Information failure can be corrected. E.g. government subsidizes
provision of information to members of society deprived from
information.
Downside to subsidies
• 1. Subsidies are difficult to target. Similar to taxes, we ask how
much subsidies should the government provide?
• Too high or too low a subsidy may be caused by information failure on
the part of the government.
• 2. Conflicts with other policies. We know that someone has to pay
these subsidies, but who?
• If it’s the government – the objectives of providing subsidies may
conflict with objectives of other policies (e.g. introducing lower taxes),
even though these policies do help firms.
Downside to subsidies
• What if it’s you, the consumer, who pays
the subsidies, but as a result, suffer from
other consequences?
• E.g. in the UK electricity industry, the
government regulates that electricity
generators have to buy a % of power from
renewable sources.
• Comparing buying power from renewable
sources to conventional ways e.g. coal, this
means higher cost to these electricity
generators. This cost is factored into the
prices that consumers ultimately pay.
Downside to subsidies
• What consumers may not realize is that
these higher prices subsidize the
generation of renewable energy.
• While there are now subsidies, this
brings effects to society: this increases
inflation (power becomes very
expensive), and can impact on other
markets e.g. coal market, and impact the
ability of low income households to
afford power.
Downside to subsidies
• 3. Subsidies can be difficult to remove. Because subsidies once
provided, can effectively increase incomes.
• If subsidies are lowered or removed, protests may ensue. In places like
Iran, Venezuela or India, attempts to remove subsidies on basic foods
or fuel have caused major riots.
3. The government sets a
maximum price.
3. The government sets a maximum price.
• If prices of goods and services are high (unaffordable), market failure
could result.
• Especially on essential items such as food and housing, or education
and healthcare.
• This is when the government steps in, as they see these things as merit
goods that generate positive externalities in consumption. There is
benefit to society.
3. The government sets a maximum price.
• The government also knows that by enacting policies, these may
reduce inequalities by increasing spending power of the poor.
• One such policy or intervention, is setting a maximum price – the
maximum price that buyers will pay, so that these merit goods are
more affordable.
• In economics, this maximum price is also sometimes referred to as
price ceiling.
3. The government sets a maximum price.
• The diagram shows how setting a
maximum price could correct market
failure.
• Suppose the market here is housing.
PE is G, QE is B.
• Price G – the market price, though
equilibrium, might not be a price that
society wants i.e. unaffordable to
some buyers.
3. The government sets a maximum price.
• Suppose the government
introduces a maximum price.
• The maximum price will be what
buyers will now have to pay. As a
result, 2 quantities emerge (A and C).
• C is the quantity that consumers will
be willing and prepared to consume.
Quantity demanded has increased
from B to C as a result of a lower
(more affordable) price.
3. The government sets a maximum price.
• A is the quantity that suppliers are
only willing and prepared to supply.
Quantity supplied has decreased from
B to A.
• Because at a lower price, suppliers
have little-to-no incentive to supply
so much housing to the market.
3. The government sets a maximum price.
• The difference between A and C is
what we refer to as excess demand,
or shortage. There are more buyers
demanding for housing (because of a
more affordable price) than sellers
supplying housing to the market.
• So, what can the government do to
resolve this shortage?
3. The government sets a maximum price.
• Rationing. In housing for example,
waiting lists may be created with
those in greatest need being offered
houses first.
• If it’s food, consumers may be given
a limited number of coupons that
they need to hand in when they buy
items at the maximum price.
3. The government sets a maximum price.
• Now, one thing to note. This
shortage tends to be short-term
(temporary), and the government
will find ways to resolve this
shortage. But at least, the
government’s policy of a maximum
price will have benefitted the
majority of buyers.
• Note that if a maximum price is
above PE, it will have no effect
(non-binding).
There are however, downsides to maximum
prices.
• 1. Black markets.
• Some of the goods bought at this
maximum price may be resold to the black
market at a higher price.
• E.g. with the Wuhan coronavirus situation
where masks are in high demand
(shortage), scalpers would attempt at
profiteering.
• Equally, producers may sell directly onto
the black market to fetch higher prices,
where some buyers are willing to pay
more (above the maximum price).
There are however, downsides to maximum
prices.
• 2. Inefficient allocation to consumers.
• Because of shortage caused by maximum price, some buyers get the
goods, while others do not.
• E.g. with housing – some buyers who need housing urgently and are
willing to pay a higher price (higher than maximum price) do not get
housing, while others who do not need housing urgently, and are
willing to only pay lower get the apartment. There is inefficient
allocation of housing to buyers.
There are however, downsides to maximum
prices.
• 3. Wasted resources.
• Buyers expend money, time and effort to cope with shortages caused
by maximum prices.
• 4. Inefficiently low quality.
• Because of a lower price, sellers are inclined to offer lower quality
goods e.g. poorly maintained conditions, although buyers would prefer
a higher quality at a higher price.
4. The government sets a
minimum price.
4. The government sets a minimum price.
• Market failure could also result when prices are too low. Low prices
please buyers but not sellers.
• E.g. especially on agricultural products.
• By introducing a minimum price – the minimum price that
consumers have to pay – this can raise incomes of sellers (farmers),
and may reduce inequalities in society.
• In economics, this minimum price is also sometimes referred to as
price floor.
4. The government sets a minimum price.
• Minimum prices may also be effective on demerit goods like alcohol
or cigarettes as higher prices deter or discourage consumer purchases
(reducing or eliminating negative externalities in consumption).
• Let’s see how a minimum price could correct market failure.
4. The government sets a minimum price.
• Suppose the market here is an
agricultural product. PE is F, QE is
B.
• Price F – the market price, though
equilibrium, might not be a price
that sellers want i.e. not enough
for revenue.
• Suppose the government
introduces a minimum price.
4. The government sets a minimum price.
• The minimum price will be what
consumers will now have to pay. As a
result, 2 quantities emerge (A and C).
Note: minimum price is always above
PE.
• C is the quantity that suppliers will be
willing and prepared to supply. Under
minimum price, quantity supplied
will increase from B to C as a result
of higher prices.
4. The government sets a minimum price.
• A is the quantity that consumers are
willing and prepared to consume.
Quantity demanded has decreased
from B to A.
• Because at a higher price, suppliers
have greater incentive to supply more
goods and services to the market.
4. The government sets a minimum price.
• The difference between A and C is
what we refer to as excess supply, or
surplus. There are more sellers
supplying to the market than buyers
demanding.
• So, what can the government do to
resolve this surplus?
• Government absorbs, gives away to
the needy, or exports the surplus at
lower prices.
4. The government sets a minimum price.
• This surplus tends to be short-term
(temporary), and the government will
find ways to resolve this surplus. But
at least, the government’s policy of a
minimum price will have benefitted
the majority of sellers.
• Note that if a minimum price is
below PE, it will have no effect (non-
binding).
Like maximum prices, there are downsides to
minimum prices.
• 1. Black markets.
• An example of a minimum price will
be minimum wage level. Under this
minimum wage level, employees (as
suppliers of labour) will be paid
higher.
• But employers (the demanders) are
less willing to employ because
increased wages are higher costs for
the business.
Like maximum prices, there are downsides to
minimum prices.
• As a result, there is surplus
(unemployment).
• Black labour (common in UK and
Europe) may occur. Employers will
pay lower than minimum wage levels
so long as job seekers accept. But
these transactions typically go
undeclared.
Like maximum prices, there are downsides to
minimum prices.
• 2. Inefficient allocation of sales among producers.
• Surplus means that some suppliers can close sales (employees can find
jobs), while others are not successful.
• There are some suppliers who need to sell more urgently do not get
buyers; while others not as urgent, manage to close sales.
• Or, some employees are willing to sell labour for less wages but do not
get jobs; while other employees do not really need a job, get jobs for
possibly higher wages.
• There is inefficient allocation/misallocation of sales among suppliers.
Like maximum prices, there are downsides to
minimum prices.
• 3. Wasted resources.
• Suppliers (or job seekers) have to expend time and energy in search of
buyers (employers).
• 4. Inefficiently high quality.
• Suppliers may take advantage of higher prices to offer buyers very
high quality of goods that buyers may not necessarily need.
• E.g. $10 inflight sandwich.
• Or, an overly qualified job seeker that the employer does not need.
5. The government imposes regulation.
5. The government imposes regulation.
• Besides indirect taxes, subsidies,
maximum prices, minimum prices,
the government could also impose
regulations to correct market
failure.
• E.g. to reduce information gaps /
failure.
• E.g. airlines may be forced to
disclose all the charges for an
airline ticket at the start of the
booking process rather than the
end.
5. The government imposes regulation.
• E.g. banks are forced to tell
customers the rate of interest on
loans.
• E.g. laying down maximum
pollution levels or banning
pollution-creating activities
altogether.
5. The government imposes regulation.
• But regulations do pose problems.
• The government may not know the right level of regulation to fix,
in order to ensure efficiency. Regulations might be too lax, or too tight.
• So, what is the correct level? Ideally where economic benefit arising
from a reduction in externality = economic cost imposed by the
regulation.
5. The government imposes regulation.
• E.g. if regulation forces firms
to have to spend £30 million
on anti-pollution measures, but
the fall in pollution may only
be worth £20 million, then that
regulation is too tight.
• Or, if the fall in pollution may
be worth £40 million, it will be
worth regulating industries to
have to pay more for anti-
pollution measures.
5. The government imposes regulation.
• Moreover, regulations tend not to discriminate between different costs of
reducing externalities.
• E.g. firms A and B have to reduce pollution emissions by the same amount.
• Firm A could reduce emissions at a cost of £3 million.
• Firm B could reduce emissions at a cost of £10 million.
• Firm A could double the reduction in pollution levels at a cost of £7 million.
• Regulations which set equal limits for firms will mean that the cost to
society of reducing pollution in this case is £13 million.
• However, would it not be cheaper for society if the reduction could be
achieved by Firm A alone at a cost of £7 million?
6. The government provides
public and merit goods.
6. The government provides public and
merit goods.
• From last lecture, we learnt that despite positive externalities public
and merit goods generate, the market ‘fails’ to provide them, or
provides them only in small quantities.
• And so, the state provides them to prevent market failure.
6. The government provides public and
merit goods.
• Suppose here – the market for a public
good – defence.
• To prevent market failure, output A
should be produced.
• However, the maximum amount
demanded on the market is only B – even
if the price is 0.
• So, the government steps in and provides
this public good (at output A), at
whatever price of defence (perfectly
inelastic supply) and makes society pay
for defence via taxes.
6. The government provides public and
merit goods.
• What about a merit good like
education?
• The free market produces output A.
• To prevent this market failure, the
government can take over all supply
from firms and supply output B at
whatever the market price (perfectly
inelastic supply).
There are however, downside to state
provision of public and merit goods.
• 1. Inefficient production.
• Unlike firms in the free market, government employees have no
incentives to cut costs to minimum.
• Or, sometimes, there is wrong mix of goods produced – especially if
goods are provided free of charge to tax payers e.g. providing too
many soldiers and too few hospital beds.
• Markets in contrast, give consumers opportunity to buy those goods
that give the greatest satisfaction.
7. The government provides
information.
7. The government provides information (to
tackle imperfect information).
• Recall information failure – where one party in a
transaction does not have all the information to
make a decision, whether producing or buying.
• The government can step in to ensure
information is provided.
• E.g. running advertising campaigns to deliver
messages about not smoking, or dangers of
drinking and driving.
• Or, sometimes, the government forces parties to
a transaction to release information, such as the
dangers of smoking on cigarette packets.
8. The government sets up
buffer stock scheme.
8. The government sets up buffer stock
scheme.
• Well, in practice, by a group of
governments to fix world prices for
some goods.
• Especially commodities such as oil,
gas, coffee, metals, etc., where prices
are volatile over time.
• Commodities are the goods that can
be interchangeable with other
commodities of the same type, and
are often raw materials/inputs for
production of other goods and
services.
8. The government sets up buffer stock
scheme.
• Essentially, the government uses the
buffer stock scheme in these 2
situations:
• With the scheme, the government can
buy and store stocks during good
harvests to prevent prices from
falling below a price level.
• The other situation is the government
can sell and release stocks during
bad harvests to prevent prices from
rising above a price level.
8. The government sets up buffer stock
scheme.
• E.g. price level (market price) is £5.
If this falls to an alarmingly low price
of £1, the government steps in to buy
stocks. This increases overall
demand, which leads to a rise in price
level.
• Similarly, if £5 rises to £15, the
government steps in to sell stocks.
This increases supply in the market,
which leads to a fall in price level.
• Essentially, the scheme stabilizes
prices in the market.
Advantages of buffer stock scheme
• If prices are stable, 1. firms in the industry are likely to invest.
• E.g. if it’s an agricultural commodity like rice, it gives farmers
incentives to plan for long-term.
• 2. It prevents sharp falls in prices.
• So, if it’s rice, it could prevent the poorest farmers sinking into
absolute poverty. Imagine an income of few pence per kg of harvest?!
• 3. Consumers can also benefit from less price volatility. Imagine
consumers paying ten times more for rice?!
About buffer stock scheme
• When we say ‘buffer stock’, we are referring to physical stock of
goods/commodities held in warehouses.
• Needless to say, the stock numbers are volatile – they come and go (in
and out of warehouse), when scheme buys or sells them off.
• So, to summarize, when free market price goes below minimum price,
the scheme buys stock, leading to increase in demand in the market,
raising the price.
• When free market price is above maximum price, the scheme sells
stock, leading to increase in supply in the market, and a fall in price.
About buffer stock scheme
• For the scheme to effectively work, stocks must rise and fall.
• Because if they only rise, the scheme will eventually run out of money
to carrying on buy stocks.
• If they only fall, eventually, there will be no stocks left in warehouse
to sell to reduce prices.
• Now, let’s see graphically how the buffer stock scheme works with
demand and supply.
• Panel A shows the free market with equilibrium M and G.
• The buffer stock agency has set a maximum price of N, min. price of L.
• Because the market price (M) is in between N and L, the buffer stock
agency does not need to intervene in the market.
• Now – panel B – assume that market price falls – and falls below L, at K.
What happens?
• The buffer stock agency will intervene by buying up stock, thereby
increasing demand (by HJ), which will raise the price back up to minimum
price of L.
• Now – panel C – assume that market price rises – and rises below N, at R.
What happens?
• The buffer stock agency will intervene by selling stock, thereby increasing
supply (by EF), which will bring the price back down to maximum price of
N.
There are however, downside to buffer stock
scheme
• 1. A considerable amount of capital is
needed.
• Money is needed to buy stocks when prices
are low.
• There are also other costs involved such as
administrative, transport, and storage of
goods purchased.
• If the stocks are food commodities –
especially perishables – they can deteriorate
in storage which add to costs.
There are however, downside to buffer stock
scheme
• Those funding the buffer stock scheme (a group of governments) 2.
must feel that it benefits them substantially because others may also
benefit without incurring costs.
• E.g. some countries whose farmers produce 60% of world output in a
commodity might set up a scheme to control world prices.
• But there is nothing that the scheme can do to prevent farmers in
countries producing the other 40% from benefiting from less volatile
prices. Those 40% become free riders on the scheme.
There are however, downside to buffer stock
scheme
• 3. Minimum prices tend to be
too high.
• In the short term, it benefits
producers because they get higher
prices than free market prices.
• But in the long term, this is
unsustainable.
• Stocks carry on building up and
eventually the buffer stock scheme
runs out of money and collapses.
There are however, downside to buffer stock
scheme
• In desperation, stocks are sold off,
depressing the market price.
• Producers will be made worse off
because now they are getting
below what would otherwise be
the free market price.
Summary
• Market failure arises because these exist:
• Externalities – when they are not accounted for by the market, that
leads to under- or over-provision and consumption.
• Public and merit goods – the positive externalities that these goods
generate, are not accounted for by the market, caused by reasons such
as imperfect information (information failure).
• Lack of competition – where 1 or only a few firms control the market
by restricting supply and raising prices, upsetting equilibrium.
Summary
• Immobility of factors – where resources in one use are difficult to be
adapted for other use.
• Inequalities – incomes are not distributed efficiently in society. There
is difference in incomes among groups in society. Low-income groups
may not be able to afford some private goods if provided by market.
• To prevent/correct market failure, the government intervenes. While
interventions bring advantages, they also pose problems.
Summary
• Indirect taxes – leading to decrease in market supply – thereby higher
prices but the decreased quantity accounts for externalities.
• Subsidies – leading to increase in market supply – lower costs for
firms, lower prices for consumers.
• Maximum prices – below PE, making goods more affordable to
consumers.
• Minimum prices – above PE, to raise incomes for suppliers, or to set
minimum wages for employees.
Summary
• Regulations – e.g. to force market firms to release/disclose
information to consumers.
• State provision of public and merit goods – because they bring
positive externalities, but the market fails to provide, or provides them
in small quantities.
• Provision of information – e.g. releasing/disclosing information to
consumers.
• Buffer stock scheme – to stabilize prices in the market for
commodities.
Readings and assignment
• Anderton, Alain. (2015). Unit 20: Types of market failure. In
Economics (6th ed.), pp. 110-112. UK: Anderton Press Ltd.
• Ibid. Unit 24: Government intervention in markets, pp. 129-135.

• Try out the exercises in these units:

• Question 1, Page 130
• Question 3, Page 132
• Question 6, Page 135