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Oil Prices by OPEC and Market Fundamentals - Report Example

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This paper "Oil Prices by OPEC and Market Fundamentals" discusses market failure as a situation where the market fails to efficiently allocate production resources, there are causes of market failure and they include market power to control prices in the market, negative and positive externalities…
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Oil Prices by OPEC and Market Fundamentals
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Download file to see previous pages Market failure is defined as the inefficient allocation of resources by the market, the free market is considered to optimally prices and resources in the production of goods and services, and this is because the price and quantity produced are determined by market forces which include the demand and the supply. The control of prices by a firm or an organization in the market results in market failure, therefore OPEC leads to market failure due to its nature in the market.

OPEC was formed in 1960 by 5 oil-producing countries which include Venezuela, Saudi Arabia, Kuwait, Iran and Iraq, The aim of this organization was to unify petroleum-producing countries in order to realize fair and stable prices of oil .other oil-producing countries joined and they include Qatar which joined the organization in 1961, Indonesia and Libya joined in 1962, Nigeria and Algeria joined in1972 and 1969 respectively, Ecuador and Angola joined in 1973 and 2007 respectively, the United Arab Emirates joined in 1967 and Gabon joined in 1975 but suspended its membership in the year 1994, Indonesia, however, has also suspended its membership starting January 2009. (OPEC, 2008)

Market failure occurs when the market fails to allocate production resources efficiently, efficiency in the market refers to social efficiency, allocation efficiency, technical efficiency, and productive efficiency. Social efficiency occurs when the social benefits and social costs are equal, when this is not the case then there are externalities. Allocation efficiency occurs when the producers in the market provide goods and services at the required price and quantity, technical efficiency occurs when production of goods and services optimally produces resources and finally, productive efficiency refers to the production of goods and services at low factor costs. (Hardwick, 1994)

Market failure is, therefore, is caused by market power, externalities, and public goods. Market power occurs in the market when a firm or a producer in the market gains market power, for example monopolies, oligopolies and the formation of cartels, these firms will control market prices and therefore result in market failure. (Mankiw, 2002) ...Download file to see next pagesRead More
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