Market failure, in its simplest terms, refers to a situation where there is an inverse relation between the public demands of goods and its supply. When there is a high demand of any goods and services and the supply for the fulfilling of those demands is very less, it is known as market failure. In this situation, the market is not able to supply with enough goods and services, but the demand increases regularly.
Market failure results in a very harsh situation. It makes the goods and service’s prices go high and makes them unaffordable for the people. This leads to financial imbalance and makes the financial gap between rich and poor more and more huge.
Market is a very unpredictable place, with each day running its course with forever changes. Market is made up of people and not just few, but a humongous number. These people change their preferences and taste every day. Thus, market is like a dimension which changes every day and every second. It can’t be predicted at all as it does not work on a single mind, but with huge number minds which changes according to its needs.
1. Positive and negative externalities: It is referred to an effect that is caused on a third part or better say affects indirectly because of the consumption of the goods and services. Positive externalities happen because of the good outcomes or effects because of the consumption of goods and services. For example, sports are taught to students or players so that they can play and build a future in it for themselves. But it indirectly affects the country as it builds a proud moment for the nation. It also helps in building awareness about the benefits of sports.
Negative externalities mean the bad effects it has on the third party due to the consumption of the goods and services. For example, people smoking cigarettes affects them and also the ones surrounding them. This leads to negative externalities.
2. Environmental concerns: Environment concerns such as pollution, global warming or extreme cold also leads to change in the demands of goods and services. Such as, during summers, people demand for goods and services that keeps them chilled such as air conditioner, cold drinks, juice and other cooing down goods and services. It becomes the sole duty of the goods and service providers to provide the people with their requirements. But sometimes what happens is that the demands are not fulfilled because of wrong allocation of resources. The market has high demands but the supply is way less.
3. Misuse of Public goods: These are those goods whose cost of production remains the same no matter how much the number of customers increase. The internet provision cost remains the same no matter how many people use it. People use it to surf and get information or for entertainment out incurring any cost. But sometimes it happens so that the people start lavishly use it. It leads to unnecessary usage and wastage of the internet. This problem of people using things without paying the cost of benefit is called free rider problem. This leads to misuse of the public goods.
4. Underutilization of merit goods: This refers to the goods and services that have been underutilized even though the supply was up to the mark. Such as education, healthcare, sports centers, etc.
5. Overutilization of negative goods and services: Goods such as cigarettes, alcohol, drugs, etc. are being overused. These things destroy the city, country and people and thus leads to market failure.
6. Monopoly power being wrongly used: Uncontrolled market leads the business industry to control the output and increase the prices so as to maximize the profit.
7. Property owning rights: Property rights refers to the owning of property. It states that people are in a right to own a property and keep it with them. But many times what happens is that people are not given any properties. This is caused due to carelessness in allocation of resources. There should be a balance on how much is to be granted to people. With the growing number of people, it is becoming hard for the government to provide them with proper places to live. It is the duty of the government to interfere in the market and make sure that the people have places to live. If properties are not distributed properly then it is known as market failure.
8. Markets become unstable: Market is a place or a dimension which is very unstable. Market forms of human being with a dynamic brain which changes its preference with changing time. It is therefore suggested to a business empire to be as dynamic as possible. To be able to change with the changing demands or environment over time. Mainly, market consists of two factors which govern it entirely- Demand and Supply. Market produces goods and services for the people and people return the market by consuming the goods and services and by paying it with money. Organizations, institutions, hospitals, business empires, schools and colleges or even the local market in your place depend on the buyer’s opinion. What the buyer wants, his/her preferences, taste, etc. All these factors determine the market conditions. It leads to market instability and thus the market keeps on changing.
9. Income gap: Market also leads to a very serious problem of income gap. Improper pricing of goods and services leads to market failure as the market goods are for everyone. But sometimes what happens is that, companies overprice the goods and services which becomes difficult for the middle-class to afford. When the economy or market fluctuates, it doesn’t affect the rich as they have enough money to afford the goods. Nor the poor who don’t care about the fluctuation in the market. If anybody is affected, it is the middle-class who suffers. Income gap leads to increase in the gap of the rich and poor. The rich become richer and the poor becomes poorer.
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The government keeps a check on these things and prohibits them from happening. It protects the economy by stopping these things from making the market fail.
Government, in order to stop the economy from market failure, has taken some measures to prevent it from happening or getting worse.
Price Mechanism: Price mechanism refers to the having a control over the price allocated to the goods and services. This helps in maintaining a balance over the rich and poor. The government can increase the price of the negative goods and services and lower the prices for beneficial goods and services. Government can also provide subsidies for the goods and services which are not affordable by the common man. This will help in countering the problem for the income gap.
Legislation and law enforcement: The government can make sure that there is no market failure by putting law enforcements such as prohibiting the factories to open in the city areas, licensing of alcohol and other negative things, arresting the polluters and keeping a check on them.
These are the ways through which, Market failure happens and he steps the government has taken in order to prevent them. For other information regarding market failure you can visit our website www.urgenthomework.com and take help as much you want. You can find other assignments also for help in other subjects or homework. Our trustworthy tutors are there for you to guide you entirely with completion of the topic.
This article is all about the market failure, there reasons and how to prevent them from happening and protect the interest of the people and economy. It should be noted that market is a very unpredictable place. Every next step should be thought well and be executed without a next chance. We hope we have been able to answer your questions and are happy to help you with your economics homework.
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