5 Reasons Why Markets Fail Chapter 7-2

1. Inadequate Competition Inefficient Resource Allocation inadequate competition usually means a firm does not use resources efficiently Higher Prices & Reduced Output artificial shortages cause high prices (monopoly) Economic & Political Power firms back certain politicians that will support their business

2. Inadequate Information When knowledge that is important to buyers is hard to find, failure may occur

3. Resource Immobility The 4 factors do not move to markets where returns are highest Ex. Continental and United Merge Some will find other work in the same town Some people will move to find work (Chicago) Some will not be able to sell their houses and have to stay for an extended period of time Some do not want to leave their hometown

4. Externalities (unintended side effect) Negative Externality =harm, cost or inconvenience suffered by a 3rd party Ex. Noise pollution caused by a new wing at the airport Positive Externality =benefit received by a 3rd party that had nothing to do with the activity Ex. Restaurant gets more business because of airport expansion

5. Public Goods Need for goods that are collective used by the public National defense Police Fire Highways Difficult to collect $ for everyone’s “fair share” Gov’t must provide these things because they cannot be withheld if people can’t pay for them