1. 5 Reasons Why Markets Fail
Chapter 7-2

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

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

4. 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

5. 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

6. 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