Market Failures Market Efficiency Occurs When: Adequate competition exists Buyers and sellers are well-informed About conditions and opportunities Resources are free to move from industry to industry Prices reflect costs of production If any of the above do not occur, market failure occurs

Inadequate Competition Dangers of Monopolies Denies consumers competition Inefficient usage of resources Economic and Political Power Large businesses can influence politics Get members elected Threaten to leave area

Inadequate Information To allocate resources efficiently, everyone needs adequate information Essential to know all markets Not just those a person is involved in Ex. Business making shoes, but would be more profitable making tents Free-enterprise needs a large amount of information

Resource Immobility It is essential that resources can be allocated quickly To determine mobility, one must look at the area A secretary in a city has high mobility A large factory shuts down, laid off workers will have a hard time allocating their resource

Externalities Externality – economic side effect Negative Externality Ex. Adding on to an airport People near by experience added noise Positive Externality Ex. Adding on to an airport Creates more jobs for people Externalities and Market Failures Costs and benefits are not reflected in market prices

Public Goods Products that are collectively consumed Free goods Market economy produces goods that can be withheld if people refuse to pay Public goods cannot be withheld Like National Defense Plus, how would you charge people for defense?