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What Causes Market Inefficiency - Assignment Example

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Summary to assignment on topic "What Causes Market Inefficiency"
Adam Smith writes in his famous work that it is the invisible hand of price mechanism that leads the economy towards equilibrium,…
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What Causes Market Inefficiency
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Download file "What Causes Market Inefficiency" to see previous pages... The following situation may lead the market mechanism in not leading to the most efficient output and market will fail. These situations can be classified under the following head:
The examples of externalities are, suppose that a person is suffering from a contagious disease. He considers that by going to a doctor,
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his costs will be the fees paid to doctor and benefits will be the cure of the disease. However, he will not take into account the fact that if he does not go to the doctor, other people might catch the same disease. This will result in less-urgency for him to go to the doctor. This shows how ignorance of negative externalities can lead to over production or irrational response. Now, let’s look at the example of negative externality in the context of a business or economic decision. Suppose you want to buy a car. The main consideration for the purchase will be the cost of the car and possible benefits attained from the car. However, market mechanism will ignore the impact of car purchase on the environment and other parties such as pollution, road congestion and accidents. This ignorance may tempt you into purchasing the good and hence there will be an over-production of good due to negative ...Download file "What Causes Market Inefficiency" to see next pagesRead More
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