Why do markets fail Essay Example | Topics and Well Written Essays - 2000 words

Why do markets fail - Essay Example According to Wilkinson (2005), â€Å" market failure is the situation where the mechanisms associated with the market unable to allocate resources effectively. In this definition the efficiency word refers to both productive as well as elective parameters. According to his view, the main reasons behind market failure can be classified into the following headings: Monopolies, External factors, Public goods, transaction costs and imperfect information (Wilkinson, 2005, pp.473-474). There are several economists who prefer to call the market failure as market fail to achieve efficiency.. Some specific situation that is contributing to market failure are regulations of the government, costs associated with the transaction, the power of the competitive market (other country), imperfect information etc. Regulations: Restrictions such as price ceilings avoid the price mechanism for competently allocating resources. Market power: Some industries may feature economies of scale, so it is absol utely possible for an incompetent market conclusion to be reached if one organization or a few large institutions are able to leave out others to the disadvantage of potential market participant. Transaction costs: If the cost of any certain product in any trade is high in the first place, a market cannot function properly and it might result in the market failure. Imperfect information: If any one party in the market has material information that the other does not, or both the parties lack substance information that would affect whether or not the deal occurs, or for what price it may take place. Externalities: A trade (or the goods being traded) may inflict considerable costs on individuals not participating in the trade. Alternately, individuals not participating in the trade would realize significant benefits from it but the parties directly involved in the trade would not. Irrational actors: One party is not of sound mind when making the trade, factors are weighted inappropria tely, long-term costs are ignored in favor of short-term benefits, etc.(Wilkinson, 2005, pp.474-478). According to Tatum (2013) market failure is a situation in which the demand for a particular product is not at par with the supply of the same product that manufacturers are now providing for sale.. There are several reasons behind the market failure, with some having to do with pricing and quality, while others are connected to the current general state of the economy. According to his viewpoint, the main reason behind this failure of the market is the externalities. These are simple factors that are outside the control of consumers or the companies producing the goods and services offered for sale. Examples of this include negative situations such as natural disasters that temporarily reduce production, or downturns in the economy that prompt consumers to greatly reduce their consumption of certain products. Positive events may also qualify as externalities, such as an economic re covery that increases consumer confidence and motivates increased purchases of non-essential and luxury products. In the former instance, companies may find that the demand for their products drops suddenly, leaving them with high inventories of finished goods that are not wanted at any price. The latter positive example may mean that, until producers can increase production to meet demand, they will not be able to adequately keep up with customer orders. Other causes of market failure have to do with an imbalance between the price of a product and its perceived level of quality. Price and quality may create a positive or a negative situation, because if consumers think that the price