Market failures are economic inefficiencies that mainly arise out of an inefficient allocation of resources. Besides, monopolies, monopsies, cartels, and oligopolies hamper perfect competition in an otherwise competitive market. In such a situation, supply and demand forces fail to make an optimal allocation of resources at prices which include all costs and benefits.
It is natural for public managers to intervene in the market mechanism on the excuse of market failures. However, such interventions may not help the markets always to improve their economic efficiency and result in non-market failures which can also be termed as government failure. This part of managerial economics can help the public managers to take such policy decisions which can minimize incidents of a market as well as government failures.
It is another debate whether public managers should intervene in the market mechanism or not. However, the market failures in following situations provide reasonable justification for the public managers to introduce intervening policies in public interest.
2- Public Goods/Free Goods
4- Asymmetrical Information
5- Property Rights
When some company or a firm attains such power that no other agent can enter the market and produce the same kind of product for one reason or the other, there can be no competition. Such non-competitive environment can be a result of monopolies, cartels, and monopolistic competition. However, monopolies are the biggest criminals to kill competitive markets. The monopoly power results in following major losses:
1- No effort to reduce the cost of production
2- No interest in introducing new technologies
3- Production level would be kept in control for maximization of profits
4- No interest in reduction of the price of the product
These all losses lead to wastage of resources on the production side and undue high prices on the consumer side. In other words, the total loss would be much higher than total gain. The public managers find every reason to intervene in such kind of market failures. They may introduce policies and regulations to allow competitors to enter the market. They may also take action to bust cartels. They may bring new technologies to reduce the cost of production.
In layman’s language, the public goods may be considered the goods being produced by the public sector. However, economists don’t agree with this concept. You may find some goods which fall in the definition of public goods, but the government does not introduce those.
Public goods are non- rivalrous (consumption by one person does not reduce availability for others) and non-excludable (no one can be excluded efficiently from benefiting). It does not provide any incentive for the private actors to invest in the public goods as they are unable to translate others’ benefits into their profits.
For example, you develop a small piece of lawn in front of your house. It beautifies your home but also provides a scenic beauty to the passer byes. You pay every penny of cost but can’t get it back. You can’t convert praise and happiness of the passer byes into money for maintenance of the lawn.
In another case, you build a big commercial park. It may enhance the price of land in the surrounding locality. You can impose fees on entry still you are unable to convert benefit of the neighboring locality into your profit. Similarly, this park would help reduce the pollution and benefit the people, but you can’t include these benefits of the free riders into your earnings.
There is practically no competition in such kind of businesses. So, public managers introduce policies which can provide public goods either through public or the private resources like police services, fire brigade, education, parks and other facilities.
Many economic actions have market externalities. This free website has been launched to publicize managerial economics issues in simple language. It involves a lot of cost for maintenance, writing, and uploading of the content. The students, teachers, and managers have been visiting it for free quality information. It is a positive externality.
If you run a factory which emits untreated gases into air and effluent into the river, it shall pollute environment on one hand and damage river life on the other. The polluted air and water can cause many diseases to the people besides increasing the greenhouse effect. The fishermen, a few hundred kilometers away, may also bear the loss in the fishery. It shall impact on national income as well as personal one. However, these costs are neither included in the cost nor the prices of the products. These kinds of market failures again invite public managers to impose a tax, introduce regulations and formulate policies to force the producers to minimize the total loss.
Similarly, traffic congestion, VIP movement, and emission of carbon fumes from vehicles also cause negative externalities which are required to be included in the costs and benefits.
Generally, this term is used for contractual liabilities when one party to the contract has more information than the other. In market failure, when a producer has more information about the cost of production, contents of the products and market prices than the consumers, an economic inefficiency takes place. Examples of such kinds of market failures arising out of the moral hazard, adverse selection, and agent-principle problem. For example, free medicine in hospitals can attract more clients than in competitive environment which alludes towards the moral hazard.
Without protection of copyrights the chances for national growth are minimized. Suppose you invent a new product and same is copied within days, you will suffer loss for costs which you paid for development of that product. Your profit shall be minimized. However, on the other side, if copyrights are protected forever, the monopolies will grow and competitor would be unable to enter into protected market.
Such situations again invite public managers to introduce such sophisticated policies which protect copyrights as well as allow competitors to enter into the market on reasonable relaxation. Such balanced policies can help the markets to be competitive as well as encourage the investors to invest in new technologies.
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