MARKET FAILURE UNIT -V

MARKET FAILURE :- Market failure occurs when private transactions result in a socially inefficient allocation of goods, services & productive resources. There are three sources of market failure:-  Market Power.  Externalities.  Public goods.  Another source of market failure asymmetric Information.

Market Power :- Consumer & Producer surplus:- Consumer surplus is the difference between what consumers are willing to pay for a given quantity of a good or service and the amount they actually pay. Producer surplus is the difference between the total revenues earned from the production and sale of a given quantity of output and what the firm would have been willing to accept for the production and sale of that quantity of output.

Externalities :- An externality is a cost or benefit resulting from a market transaction that is imposed upon third parties. These third party effects are called externalities. Third parties are positively or negatively affected by a market transaction. There are two types:- 1.External Economies or Positive Externalities in Production. 2.External Diseconomies or Negative Externalities in Production. Transaction costs defined as the resources necessary to transfer, establish & maintain property rights.

Coase theorem:- A market determined solution to the externality problem. The theorem states that the assignment of well defined private property rights will result in a socially efficient allocation of productive resources and a socially optimal level of goods & services. Conceptually it fails for the following reasons:- 1.Externalities are defined by Transactions Costs. 2.Transaction costs are ubiquitous. 3.Definition problems.

Public Goods :- The possession of certain properties that some goods are called public goods. They are produced in the public sector or private sector. Characteristics of public goods are :- 1. Non-Rivalry in consumption. 2. Non-Excludiability. 3. Free-Rider’s Problem & Public Goods. 4. Public goods & Pareto Efficiency.

Concept of Asymmetric Information:- 1. Imperfect information. 2. Asymmetric information. Equilibrium in a market with asymmetric information:- 1. Adverse selection. 2. Appraisal. 3. Screening.

Market intervention by Government Four basic tools in change economic outcomes:- 1. Taxation & Subsidies. 2. Public sector production. 3. Antitrust Legislation. 4. Regulation.

Antitrust Legislation:- Antitrust legislation represents government intervention in the marketplace, such as making it illegal for firms in an industry to engage in collusive pricing & output practices, to prevent industry abuse of market power. Important pieces of antitrust legislation are:- 1.Sherman Act Clayton Act Robinson-Patman Act Wheeler-Lea Act 1938.

Regulation :- Regulation into two types:- 1.Economic regulations. 2.Social regulations.

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