Jing Yuan Tian Explain, with examples, how information failure, factor immobility, and government actions may

contribute to market failure. Market failure is when there is a difference between the actual market outcome and the ideal market outcome. Information failure, factor immobility and government actions all contribute to market failure due to them causing misallocation and or inefficient use of resources. Information failure is when there is inaccurate or misleading information that makes people ignore the benefits and costs of a product. This leads to consumers making decisions that do not maximize their welfare, which could be either an overconsumption of demerit goods and or an under consumption of merit goods. This leads to allocative inefficiency and market failure. For example, because of lack of education on the negative effects of smoking, people consume cigarettes, which is a demerit good. This leads to an overconsumption of cigarettes, which causes a negative externality of consumption, hence leading to market failure. Government actions and interventions may deepen existing market failure or create a new market failure. This could be due to the governments having imperfect information about the economy about the long-term costs and benefits of their policy, which leads to myopic policy making. Also, the government may make policies in favor of their political self-interests that may also prevent the maximization of social welfare. Therefore, these often lead to a misallocation of resources that lead to market failure. For example, the governments attempt to redistribute income by raising income taxes will lead to a loss of incentives for people to work harder. This leads to reduced productivity and efficiency in the economy, resulting in market failure. Factor immobility places barriers to the movement of factor inputs to their most productive use which causes misallocation and inefficient use of resources, which lead to market failure. There are two types of factor immobility. Occupational immobility occurs when there are barriers to the mobility of factors of production between different industries and occupations. This leads to loss of productive and allocative efficiency which both contribute to market failure. For example, there might be labour immobility in the steel factory. When the steel factory closes, the workers might find it difficult to find another job, due to their job-specific skills. This leads to structural unemployment and decreased productivity and efficiency due to waste of scarce resources. Another type of factor immobility is geographical immobility, which are barriers to people moving from one area to another. This could be due to the costs of moving, the differences in costs of living and house prices in the two areas. These barriers prevent people of finding potential jobs in another place and pursuing better jobs, which all lead to misallocation of resources and inefficiency.