Market Failure Essay

Question 3 part a:

“Market failure” is an economic term addresses the situation when a good (or service) in any market is over produced and consumers demand doesn’t equate the good production or on the other hand the suppliers could not keep up with consumption demands, which leads to losing equilibrium in the market and failing in allocating resources efficiently.

Market failure have major effects on the economy due to misallocation of resources and without any government intervention to attain the location of these resources it could lead to a waste in recourses.

There are different types of market failures such as:

-Externalities: external costs and external benefits which is not considered in the market activities by the consumers and suppliers which affects a third party, there are some negative externalities creating external costs and will be overproduced if left to mechanism of the market such as tobacco and alcohol industry while there are some positive externalities such as healthcare and education which if left to the mechanism of the market will be under produced leading to market failure.

-Missing markets: for example traffic light or street lights which are called public goods, they have non rivalry means when someone consumes the good will not reduce the quantity available for others and non excludability which means when the good is provided for one anyone can use it and can not be stopped from using it which creates the free rider problem when every one want to use the product but will wait for someone to pay for it so they could use it for free at the end no one buys that product and will be missed in the market so the government must interfere and pay for it.

-Non equal knowledge: such as dentists and ...

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...ics is a situation when both parties in economic activity lack the knowledge or one party have more information than the other and in both cases it leads to misallocation of resources as the one party pays more or less and the other party produce less or more which leads to market failure.

There are many examples of imperfect information such as used car market where the seller has better information about the condition of the car than the buyer and this situation usually ends with the buyer paying more than the real value of the car due to difficulties in assessing the car condition with limited information.

Another example is car insurance where the insurance companies do not know about each driver driving risks and hence we can see that imperfect information is a major type of market failure and should be considered by economists when analyzing any market.