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Market Failures

Market Failures. Inadequate Competition. Dangers of monopolies - it denies consumers the benefit of competition. People cannot depend on the free market system to allocate resources efficiently, or to bring the greatest satisfaction

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Market Failures

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  1. Market Failures

  2. Inadequate Competition • Dangers of monopolies- it denies consumers the benefit of competition. People cannot depend on the free market system to allocate resources efficiently, or to bring the greatest satisfaction • Political Power- inadequate competition may enable a business to influence politics – i.e., tax breaks

  3. Externalities • an economic side effect that either benefits are harms a third party not directly involved in the activity • can cause market failure if the price mechanism does not take into account the full social costs and social benefits of production and consumption. • SOCIAL COST = PRIVATE COST + EXTERNALITY

  4. Externalities • Negative Externality: harmful side effect that affects an uninvolved third party (ex. new airport in your neighborhood) • producers don't take responsibility for external costs that exist--these are passed on to society. • Positive Externality: beneficial side effect that affects an uninvolved third party ( ex. airport generates more jobs) • Keeping your yard well maintained helps your house's value and also helps the value of your neighbors' homes.

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