Markets - why they fail Essay -- Economics

Markets - why they fail * Allocative efficiency occurs when resources are distributed in such a way that no consumers could be made better off without other consumers becoming worse off. * Dynamic efficiency occurs when resources are allocated efficiently over time. * Productive efficiency is achieved when production is achieved at lowest cost. * Technical efficiency is achieved when a given quantity of output is produced with a minimum number of inputs. Consumer and Producer Surplus ============================= Text Box: A perfectly competitive market consists of: Many firms in the industry- therefore firms cannot manipulate the prices. Low barriers to entry and exit- if profits are achievable new firms can enter the market at little cost. Homogenous products- no branding allows new entrants to win customers fairly. Perfect knowledge- consumers and producers know everything about market ´s prices and products. In a perfectly competitive market: There is productive efficiency- because costs must be kept at a minimum to break even. There is allocative efficiency- producers will produce no more or less than consumers demand at a given price. There is NOT dynamic efficiency-as there is perfect knowledge, there is no incentive for R&D. Types of Market Failure ======================= 1. Monopoly Power ================= * A monopoly exists of there is only one firm or supplier in the economy * A firm holds a monopoly share if it holds a market share that exceeds 25%. Why monopoly power market failure exists ---------------------------------------- Firms gain monopoly powers in the long run because of barriers to entry to the industry, preventing other firms entering th... ...more serious market failures. E.g Common Agricultural Policy dumping excess supply of food caused by minimum pricing on world market, thus crashing world prices. Therefore farmers outside EU experience lower incomes. Public choice theory - The government may not make decisions to maximise economic welfare but will instead make decisions on spending and taxation that will favour consumers, who are voters. Local interests (Textile plant in constituency, tax on imports) Favouring minorities (middle class voters more likely to vote than working class) Conflicting Personal Interests (corruption) Short-termism (do what is best on the short term but ignore the long term consequences because there is re-election every 5 years) Regulatory Capture - Groups such as monopolies can strongly influence the way they are being regulated to their own advantage Markets - why they fail Essay -- Economics Markets - why they fail * Allocative efficiency occurs when resources are distributed in such a way that no consumers could be made better off without other consumers becoming worse off. * Dynamic efficiency occurs when resources are allocated efficiently over time. * Productive efficiency is achieved when production is achieved at lowest cost. * Technical efficiency is achieved when a given quantity of output is produced with a minimum number of inputs. Consumer and Producer Surplus ============================= Text Box: A perfectly competitive market consists of: Many firms in the industry- therefore firms cannot manipulate the prices. Low barriers to entry and exit- if profits are achievable new firms can enter the market at little cost. Homogenous products- no branding allows new entrants to win customers fairly. Perfect knowledge- consumers and producers know everything about market ´s prices and products. In a perfectly competitive market: There is productive efficiency- because costs must be kept at a minimum to break even. There is allocative efficiency- producers will produce no more or less than consumers demand at a given price. There is NOT dynamic efficiency-as there is perfect knowledge, there is no incentive for R&D. Types of Market Failure ======================= 1. Monopoly Power ================= * A monopoly exists of there is only one firm or supplier in the economy * A firm holds a monopoly share if it holds a market share that exceeds 25%. Why monopoly power market failure exists ---------------------------------------- Firms gain monopoly powers in the long run because of barriers to entry to the industry, preventing other firms entering th... ...more serious market failures. E.g Common Agricultural Policy dumping excess supply of food caused by minimum pricing on world market, thus crashing world prices. Therefore farmers outside EU experience lower incomes. Public choice theory - The government may not make decisions to maximise economic welfare but will instead make decisions on spending and taxation that will favour consumers, who are voters. Local interests (Textile plant in constituency, tax on imports) Favouring minorities (middle class voters more likely to vote than working class) Conflicting Personal Interests (corruption) Short-termism (do what is best on the short term but ignore the long term consequences because there is re-election every 5 years) Regulatory Capture - Groups such as monopolies can strongly influence the way they are being regulated to their own advantage