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B200 TMA02 - Essay Example

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Market failure is a concept, which holds that there is inefficient allocation of goods and services by a free market. Market failure can better be explained as a situation in which an individual or single entity's actions towards fulfillment of its own interests lead to unsatisfactory outcomes for the society on the whole.
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B200 TMA02
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Download file to see previous pages This can lead to inefficiency due to imperfect competition, which can take many different forms, such as monopolies, monopsonies, cartels, or monopolistic competition, if the agent does not implement perfect price discrimination. OPEC (oil cartel in Middle East is an example of this).
Second, the actions of an agent can have externalities, which are innate to the methods of production, or other conditions important to the market. An externality occurs when an economic activity causes external costs or external benefits to third party stakeholders who did not directly affect the economic transaction. In a competitive market, the existence of externalities would mean that either too much or too little of the good would be produced and consumed in terms of overall cost and benefit to society.
Finally, some markets can fail due to the nature of certain goods, or the nature of their exchange. For instance, goods can display the attributes of public goods or common-pool resources, while markets may have significant transaction costs, agency problems, or informational asymmetry. In general, all of these situations can produce inefficiency, and a resulting market failure.
"One cause of market failure is the limited nature of property rights. ...
By extending these rights, individuals may be able to prevent other people imposing costs on them, or charge them for doing so." (2000: pp. 152-153)
As a result, an agent can have imperfect control over the uses of its commodity, as the system of property rights that defines this control is not comprehensive. Typically, this includes two basic rights that have more generalized nature - excludability and transferability. Excludability caters to the an agent's ability to control who can use its commodity, how much, and for how long - and also the associated costs for doing so. Transferability states the right of an agent to transfer the rights of its commodity from one agent to another, primarily by selling or leasing a commodity, and associated costs associated for doing so. If a system of rights cannot fully guarantee these at low (or no) cost, then an inefficient distribution can be the consequence.
There can be many examples of market failure. In this author's region, for instance, traffic congestion is an example, as driving can be considered to impose hidden costs on other drivers and the society, whereas the use of public transportation and/or other ways of avoiding driving to mitigate traffic congestion would be more beneficial to society as a whole. Other common global examples of market failure may include environmental issues such as pollution and exploitation of natural resources to an excessive extent.
The Organization of Petroleum Exporting Countries (OPEC) is, currently, a cartel of 12 countries comprising Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates, and Venezuela. One of its principal goals ...Download file to see next pagesRead More
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