Analysis of Market Failures - Assignment Example

The presence of public and private goods also results in market failures. Public goods are those goods which benefit all, but no one wants to pay forthem. One example of a public good is street lights. Since, people know that everyone needs it, someone is going to pay for it and they want to free-ride on the back of a person who pays for it. However, no one is foolish and hence in the free market, price mechanism fails to provide these goods. This is a problem and cause markets to fail because despite of the fact, the good has a good demand, no one pays for it and the good is never provide by the forces of price mechanism.

Therefore, in order to counter this market failure, government intervenes, takes taxes from people and provides them the goods which are not provided by price mechanism, such as street lights, light houses, police etcThese were some cases, where market forces of price mechanism fails to provide the people with right quantity of goods and results in market failures. However, a new way adopted by most governments to counter market failures is by adopting a mixed economic system, where there is both price mechanism and government control.

Whenever price mechanism fails to provide a good or service, or over or under provides it, the government comes forward and takes care of the market. For example, to counter the over production of demerit goods, it increases the taxes on those goods. Similarly, in order to increase the production of merit goods, it usually provides subsidies on them, so that these goods are provided more in the market. Thus, we can conclude from this essay that even the most efficient system of allocation of resources can sometimes fail to allocate the resources in most efficient way.

This situation is known as market failure, and if not dealt properly, it will lead the market towards inefficiency and hence there is a need for good government control to counter the problem.In this case there was a demand for public good but nether John and Mary were willing to provide the good. The demand is DH and there is no supply curve. Similarly, both wanted to free ride other. However as a result of this government will take action and provide this good, financing it with the tax money.

Just as shown above in the second diagram. 2) The fifth power works in not the efficient output because of the fact that the marginal benefit resulting from the fifth cracker is great than the marginal cost. The marginal benefit sum equals to $25, whereas the cost of cracker is only $20. As a result, the value delivered by the fifth cracker is great. Since the rule of economics say that in order to produce the efficient output, Marginal Benefits should be equal to marginal cost. The fifth firework is not the most efficient output and allocative in efficiency exists in the situation because MB > MC.

The fifth firework, as a result, will take place. There is also a chance that more than five fireworks will take place if these five friends want to get rid of the allocative efficient. The more fireworks they do, the marginal benefit is going to come down and because our cost is fixed at $20, the marginal benefit is soon going to come down and will be equal to $20. Therefore, these friends should take into account the situation, should go with the fifth firework and should continue to keep on doing fireworks until there marginal benefit is equal to $20.

This will create allocative and productive efficiency at a point where MB = MC.References:1. John Sloman (2001). Economics. Pearson Publishing2. Collin Bamford. (2003). As and A Level Economics. Cambridge University Press.3. Lipsey and Chrystal. (2002). Economics. Oxford University Press.4. Manuel G. Velasquez (2001). Business Ethics: Cases and Concepts. Prentice Hall