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Market Failure and Government Intervention - Coursework Example

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This coursework "Market Failure and Government Intervention" describes the main causes of market failure and examples of government intervention and consequences. This paper outlines that the government should intervene to promote a balanced and successful economy…
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Extract of sample "Market Failure and Government Intervention"

Download file to see previous pages Pareto inefficiency developed by Vilfredo Pareto: means that the economy does not produce the maximum goods and services required from its resources. Productive inefficiency is where the business does not produce from its lowest unit-cost. X inefficiency occurs when the firm’s output is not at its greatest. Allocative inefficiency exists where the consumers pay inefficient prices for commodities. Dynamic inefficiency occurs when companies are less technologically progressive due to a lack of incentive. Lastly, Social inefficiency is when the price mechanism ignores the benefits and costs associated with economic exchanges (Hetzel, 2012).
A monopoly is an exclusive predominance in the supply or trading of a particular commodity or service in the market. A monopoly can exist where a company has large economies of production. If the company’s cost of production reduces while the scale of its business increases, its output production would be maximized. The existing companies will become bigger by having cost advantages over their rivals and the new entrants. Some companies can also have monopoly power through predatory power; which involves dropping the prices too low so as to prevent existing and potential rivals into the market. Limit pricing is also a monopoly mechanism where businesses set prices below the average costs of the new entrants (Hetzel, 2012).
Some companies can perpetually have the ownership of some scarce resources over time. The early entrants may tie up the market of some existing limited resources so as to prevent other entrants from exploiting the resources. Heavy advertising expenditures of the existing monopoly firms can discourage the new entrants from participating in the particular market. Brand loyalty and the company’s loyalty schemes can deter the existing or potential rivals from competing in the same industry. The consumers’ are normally attached to the company, adding to the difficulties of the potential firms.  ...Download file to see next pagesRead More
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