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Economic Issues: Outcome 3

Market Failure
Connor Chivas
16/12/2015

Table of Contents
MARKET FAILURE........................................................................................... 2
PUBLIC GOODS.............................................................................................. 2
MERIT GOODS............................................................................................... 2
EXTERNALITIES............................................................................................. 3
IMPERFECT COMPETITION..............................................................................3
GOVERNMENT POLICY....................................................................................3
ACHIEVING THIS POLICY.................................................................................3
EVALUATE THE SUCCESS OF THE POLICY.........................................................4
BIBLIOGRAPHY.............................................................................................. 5

Connor Chivas

Word Count:880

Market Failure
When economic efficiency is not achieved this creates a Market failure.
Governments intervene in sub-optimal markets, these markets do not allocate their
scarce resources effectively in order to capture the highest social welfare.

Public Goods
The main factors of public goods are non-excludability, non-rival consumption and
non-rejectable. A public good is consumed by the majority of the public without direct
payment, while still remaining functional by the massive use of the public.
The private sector cannot monetise on public goods because if one person is
supplied then everyone is.
So the government steps in and provides public goods for consumption in exchange
for general taxation. This prevents market failure by estimating the social benefits of
public goods and providing what is needed in order to be achieve the highest social
welfare.
Some examples of public goods are street lights, police services, roads and public
parks.

Merit Goods
The government decides which goods and services are considered merit by how
much the public will consume them. If a service will be under-consumed the
government will subsidise or provide it free to help boost the consumption and not
limit the service to paying people only.
Sometimes the private sector provides specialised merit goods and services for
example people can buy private health care insurance.
Merit goods are usually valued as a necessity to people with or without money. Also
the consumption of a merit good generates positive externalities, which means the
benefit socially outweighs the private sector benefit.
The government helps provide merit goods in order to promote their consumption
and gain the benefits to keep the market out of a failure state.
Some examples of merit goods are health services, educations and public libraries.

Connor Chivas

Word Count:880

Externalities
These are known as third party effects that are made from the production or
consumption of goods and services in which no compensation is paid.
Market failure is caused when the government does not properly take the social
costs and benefits created by production or consumption into consideration.
An example of this would be waste from factory. If the waste is pumped into a river or
dumped in a waste dump it creates negative externalities which create social costs
through clean-up costs and or health costs.

Imperfect competition
There are very few markets that become perfect competitive markets most remain
imperfect. The government tries to regulate the market in order to deny a monopoly
occurring.
A monopoly power is negative as it causes a net economic welfare loss of both
consumer and producer surplus. The price will rise because of the lack of
competition means consumers face a lower standard of living.

Government Policy
The competition policy was put in place in order to influence and oversee the
marketplaces competitive environment. This is mainly to stop monopolies being
formed and causing a lower standard of living.
Promoting competition and making markets work better, are the aims of the policy. It
also ensures work is done into technological innovation in the markets. It also allows
for a competitive price to be set between suppliers that is still good for the
consumers.

Achieving this Policy


There are 4 main features used in order to achieve this policy.
The Antitrust & cartels, which involves removing the agreements that aim to restrict
competition through processes like price fixing set in place by the major market
shareholder.
Market liberalisation works to launch competition in market sectors that are largely
monopolised. This allows new companies to be introduced and allows for
Connor Chivas

Word Count:880

competitive prices for consumers. Some examples of these are air transport and
retail banking.
State aid is analysed to ensure that government subsidies are at the right level for
specific markets in order to promote equal competition. The state aid control needs
to protect certain markets to make sure they are getting the correct amount of
subsidies to be inviting for potential companies.
Merger control establishes the rules and investigates mergers between firms in order
to stop a dominant market force being created. Without the policy in place 2 large
firms could merge and then set the prices to extraordinarily high.
Regulators also have a large role in helping with the policy. They are given the job of
overseeing the markets and investigating the changes for producers and consumers.

Evaluate the Success of the Policy


The competition policy is very successful and somewhat essential for the market
environment and public. The policy achieves the basic aim which is to stop the
abusing of monopoly powers that large companies could gain.
The policy allows new markets and existing to avoid market failure by promoting
competitiveness in the market. As well as allowing companies to innovate, keep
competitive pricing and keep high quality all for the consumers.
The success in theory is great and could help make a perfect market, however
proving firms are colluding is difficult and can cost a lot of money on training and
hiring regulators to work as undercover surveillance.
There are also many ways in which certain types of companies can be seen to be
cheating for example a large grocery store moving into the convenience store
market.
However the good practise of the policy outweighs the problems and in general
helps the market stay an imperfect or perfect market and stays away from market
failure.

Connor Chivas

Word Count:880

Bibliography
Public Goods. Available at
http://www.tutor2u.net/economics/reference/public-goods
Accessed 30th November 2015
Merit Goods. Available at
http://www.tutor2u.net/economics/reference/merit-goods
Accessed 30th November 2015
Imperfect competition
http://economictimes.indiatimes.com/definition/imperfect-competition
Accessed 2nd December 2015
Competition policy in markets and industries
http://www.tutor2u.net/economics/reference/competition-policy-in-markets-andindustries
Accessed 2nd December 2015
Competition
http://www.economicshelp.org/microessays/competition/
Accessed 2nd December 2015
Price Fixing
http://www.investopedia.com/terms/p/pricefixing.asp
Accessed 2nd December 2015
Evaluation of competition policy
http://www.economicsonline.co.uk/Business_economics/Evaluation_of_competition_
policy.html
Accessed 4th December 2015
EU Competition Policy
http://www.economicsonline.co.uk/Business_economics/European_competition_polic
y.html
Accessed 4th December 2015

Connor Chivas

Word Count:880