Perfect Market and Market Failures - Essay Example

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The perfect market is a market where the trade of goods and services occur in the most suitable manner such that there is maximum benefit for the producer, consumer and the society as a whole. But in reality it is very difficult to see the perfect market. Market failures occur due to several reasons and some of its examples are traffic jam, credit crunch…
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Perfect Market and Market Failures
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"Perfect Market and Market Failures"

Download file to see previous pages There are a large number of buyers and sellers in the market for a particular product and there is perfect freedom for entry into as well as exit from the market. There is sufficient supply of the product in the market and the purchase made by any single individual would not affect the market. The product sold is homogenous in all parts of the market and all the buyers and sellers are having complete information regarding the prices in different parts of the market.The producers of a product, whether farmers or companies or any other organizations, who are not putting their resource into complete use or wasting the resources, would fail in their business. The same thing happens if they produce their product more than the demand for that product or produce the product with a wrong technology. In a perfect market all products are produced in the most competent manner. There is no wastage of resources and the products are produced with minimum costs and in exact quantity as required by the market.Only the required amount of products is produced so that there is no surplus or deficit. If there is surplus, then the price would reduce and if there is deficit, the price would go up. In other words the amount that is produced would be equal to the demand of the product. Then the price of the product would be equal to its cost and would be equal to the worth attached to it by the customer.
4. Other assumptions include no taxes or public goods and other externalities.
When the production as well as use of goods and services in a market is not efficient, it is called market failures (Krugman and Wells, 2006). It occurs usually when the individual's interest is different from the interest of the society. In most cases it calls for government interventions to solve the situation.
There are many reasons for market failure. When a producer of the goods or services gain market power in such a way that he can control the trade of the product and impedes the interest of other traders, then a condition called imperfect competition occurs. This can be monopoly, monopolistic competition, monopsony, cartels etc. Another condition that could lead to market failure is the existence of either positive or negative externalities. Yet another reason is the presence of public goods in the market. Market failure can also occur when the resources are common (Krugman and Wells, 2006).
One of the most important examples of a market failure is traffic congestion. Roads are public goods and a resource that is common to all. In the last two decades there has been a tremendous increase in the number of vehicles produced and used and there is no corresponding increase in the road space (Harford, 2006). So the demand for road space is more than its supply. This in turn results in traffic congestion. Traffic congestion results in longer time required to reach a place, slowing of the speed of the vehicle, which would increase cost of driving and this could seriously affect trade. When the traffic comes to a complete stop it is called traffic jam. ...Download file to see next pagesRead More
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