Market failure is a free market where the allocation of goods and service is inefficient. Sometimes entrepreneurs or businesses will pursuit there own interests rather than the most beneficial option of the business and this can lead to inefficiency. There are many types of market failure here are some of them:
- Productive and allocative inefficiency- Markets may fail to produce and allocate scarce resources in the most efficient way.
- Monopoly power-Markets may fail to control the abuses of monopoly power.
- Missing markets- a failure to meet a need or want, such as the need for public goods, such as defence, street lighting, and highways.
- Incomplete markets- Markets may fail to produce enough merit goods, such as education and healthcare.
- De-merit goods- Failure to control the manufacture and sale of goods like cigarettes and alcohol, which have less merit than consumers perceive.
- Negative externalities-A business may not consider the actions of third parties such as car drivers, who may fail to take into account the traffic congestion they create for others. Third-parties are individuals, organisations, or communities indirectly benefiting or suffering as a result of the actions of consumers and producers attempting to pursue their own self interest.
- Property rights-There is a lot of importance in making property rights, failure to do so may lead to replicas of products being made for cheaper.
- Information failure-Not having enough information on the entrance of a market or a market transaction.
- Unstable markets- e.g. agriculture, foreign exchange and credit markets .
- Inequality- Limiting the incomes and having certain bias e.g. age, gender.
Finally there is remedies these are broken into two strategies:
- Price mechanisms
- Legislation and force
Price mechanisms shows the relationship between suppliers and the consumers. Behaviour of consumers can change through financial incentives and likewise the price of products can change consumer choice.
Legislation is used to change consumer behaviour there are implications in place for example a pub license or pollution measures in place.
Cartels and Collusions
Collusion is an agreement between two or more businesses that try to restrict competition by misleading others of legal rights, or gaining an unfair advantage. There are many ways that businesses collude such as limiting production, becoming price leaders in the market.
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