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Market Failure

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Lack of Competition

  • Competition in markets results in:
    • Low prices
    • Variety of goods and services produced
    • Good service
    • Timely innovation

But, when markets fail because of lack of competition or for other reasons, government may need to intervene.

In some cases, it may be more efficient to have only one or a small number of large firms in a market. For example, electric power

In other case, where there are large firms, they may be able to weaken or exclude competitors. For example, Microsoft in computer software

But, whenever there is a lack of competition, there may be high prices and other problems.

Government may need to intervene to protect consumers. Possible government actions may include:

  1. Using antitrust laws to break up large firms or prosecute them if they attempt to collude together to set high prices.
  2. Regulating firms by giving a government body the right to
    approve the prices they can charge.

Public Goods

Sometimes, people can receive benefits without paying for them. Goods or activities that have this characteristic are called public goods.

The best is example is national defense. Once the system is in place, it protects everyone. As a result, there would be no incentive for people to voluntarily pay for a national defense system.

For national defense to be provided, government must use its compulsory power to tax in order to pay for it.

Spillovers

Some activities impose costs that "spill over" onto people other than the buyer. Pollution is a good example because a good such as paper may be purchased in Utah, but produce in West Virginia where it caused lots of pollution.

Polluters don’t usually have to pay for the air or water that they pollute. As a result, they don’t consider the costs they are imposing on others and have no real incentive not to pollute

To reduce pollution, government may need to intervene by imposing regulations or in some other way giving firms a reason to reduce pollution.

Copyright 2008, by the Contributing Authors. Cite/attribute Resource . factadmin. (2007, October 25). Market Failure. Retrieved January 08, 2011, from Free Online Course Materials — USU OpenCourseWare Web site: http://ocw.usu.edu/university-studies/u-s-institutions/market-failure.html. This work is licensed under a Creative Commons License Creative Commons License