Sources Of Market Failure Analysis

INTRODUCTION A market exist wherever there are buyers and sellers of a particular good. A market economy is an economy which allows the market to determine the allocation of resources. It is obvious that market fails. Still, the question needs to be asked: ‘fail at what?’ The response to the question is: ‘Fail at delivering economic resources’

(Bamford and Grant, 2013). A pricing system cannot easily take care of externalities without non-market intervention. Nor can it provide a sufficient amount of public goods. Where there are such problems in allocating resources, these are instances of market failure (peter et al, 2000). Market failure exists when the competitive result of markets is not efficient from the point of view of

society.

However, in many market, there are either only a small number of buyer or smaller number of supplier. Market failure is likely to exist in a market where competition is not perfect. In a market economy, firms may come to dominate and have monopoly power which can lead to higher prices and lower level of output leading to a loss in welfare. This also leads to allocative and productive inefficiency (Anderton 2008). A market should be competitive because if a firm is dominant, the firm will be able to put prices to a level that is above marginal cost.

• ECONOMIC INEQUALITY: . The cause of market failure is not only from inefficiency in the economy. It can also be caused by economic inequality. In a free market economy, it depends on the income of the household in which an individual live for an individual to consume. Whenever there is inequality in income and wealth of different groups in a society government may intervene, thereby reallocating income to make it more equal the state may provide income in form of benefits, or goods and services such as healthcare services etc. in order to increase consumption level to low income

Externalities often arise because property rights are not completely allocated. An alternative to regulation is for government to extend property rights to the citizens. Extension of property right can give workers the right to sue for compensation if the worker gets injured in the work place (Anderton, 2008). Extending property right is a means of internalizing externality by doing this the government will be able to eliminate the externality by bringing it back into framework of the market system.

• THROUGH MINIMUM AND MAXIMUM PRICING POLICY: The government may help in protecting the consumers and the producers through the use of pricing policies. Minimum pricing policy is used by government to protect the producers because if a seller import goods, due to high import duty on the product the seller will increase the price of the product. Then the government will help the producers by buying the surplus since there has been reduction in demand.