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Market Failures in Microeconomics - Essay Example

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The term economics stems from the Ancient Greek (oikonomia - management and administration of a household) from (oikos - house) + (nomos - custom or law), meaning the rules of the household. Economics is the social science that examines the production, allocation, and utilization of goods and services…
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Market Failures in Microeconomics

Download file to see previous pages... This is basically the study of interaction between the individual buyers and the sellers and the factors that cause them to make their buying or selling decisions. In an ideal world an equilibrium is achieved in the market, meaning only the amount of goods demanded is being supplied while fully utilizing all the available resources and the whole society benefits. It must be realized that in the real world a "perfect economy" never exists. Recognizing the truth that is not a perfect world, let's examine a few factors which usually end up disturbing the market equilibrium henceforth causing a market failure. A market failure is any condition in which the quantity of goods/services demanded by the consumer is not equal to the quantity supplied by the suppliers. This quantity can be less or more than the market demand. A few such factors which can cause a market failure are agents gaining market power, externalities and sometimes a market failure is caused due to the nature of goods/services or their nature of exchange. These are the main three factors which break the equilibrium and cause a market failure.
What does "an agent gaining market power" mean to an individual This term simply refers to the some individuals or firms having certain advantages over the others, which is the basis for the market equilibrium to break and therefore causing a market failure. ...
ies such as selective price cutting, buyouts, and massive advertising to block entry and competition from even the most innovative new firms and existing rivals. Moreover, rent-seeking dominant firms have been known to persuade government to give them tax breaks, subsidies, and tariff protection that strengthens their market powers" (Brue, McConnell and R.R 256). For instance a firm maybe able to price their goods in such a way so that it is beneficial to them but hurting the competition. From the individuals' point of view, certain groups which require occupational licensing (such as doctors, pilots etc.) are favored. Only the licensed group can obtain high income levels, therefore these groups end up with the advantage of gaining market power, referring to buying power. The basic principle of any perfect society is equality. When a buyer or a seller disturbs the equality principle by gaining market power, this breaks the equilibrium and henceforth causes a market failure. Certain outcomes, such as monopoly, can be very harmful to the consumers. If a firm is able to price their product in a such a way that benefits them, this can literally cause the competition to be driven out of business. Once there is no competition left, the firm is free to overcharge, harming the consumers. This situation can be prevented through government policies and regulations. One such example of prevention is The Competition Act of 1998 in UK, which prevents any anti-competition agreements between businesses. An other factors that can contribute to a market failure are externalities.
An externality of an economic transaction is an impact on a participant that is not directly engaged in the transaction. In such circumstances, costs do not reflect the full value or gains in ...Download file to see next pagesRead More
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