Market Failure and the Role of Government in Relation to Each Situation Which Is a Result of Market Failure

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CONTENTS

1.        Market failure        3

1.2        Merit good        3

1.3        Public good        3

1.4        Imperfect competition        3

1.5        Externalities        4

2.        UK Government policy on competition        4

2.1 The evaluation        5

3.        Conclusion        5

4.        Reference        5

1. Market failure

Market failure occurs when the allocations of goods and services by a free market economy is not efficient or is failing in some way, often leading to a net social welfare loss. In other words, the markets cannot adjust efficiently on the allocations of resources, so that is market failure, which we can’t avoid in economic activities.

1. Merit good

A merit good is the goods or services which are helpful for the society. However, these can’t be supplied by private sector, they are provided by the government. Because they will be under-consumed, if they are supplied by private sector. Therefore, the government need to play a role and intervene in the economy to get over these difficulties. There are two main examples are health services and education. Many people can afford these goods, however, there are many people cannot pay these goods. If government don’t intervene, there will be many people cannot go to school and get good treatment, which will cause increased mortality and with the risk of social unrest.

1. Public good

Public goods are non-excludable and non-rivalrous which means that the consumption of public goods of one person won’t affect other people to consume these goods. Public goods are the commodities that wouldn’t be provided by the private sector since they wouldn’t pay for them, though these goods are helpful for them, so the government has to set in to correct this problem in order to bring more benefits to our society. For example, the army, national defense and law enforcement are generally provided by the government. Besides, government will raise the finance by taxation.

1. Imperfect competition

Imperfect competition is a term which is used to describe the characteristics of the imperfect markets. In most situations, it is difficult to realize the perfect competition world which there are free and no suppliers to manipulate this market. Therefore, many markets in this world show the characteristics of imperfect competition. There are five kinds of imperfect competition, which are monopolistic competition, monopoly, oligopoly, monopsony and oligopsony. In this situation, In order to keep the stability of the market, the government have to intervene when there is one company has a lot of power. The government try to prohibit the monopoly in most markets and regulate the prices that are allowed in monopoly market.

1. Externalities

There are positive or negative results of an economic activity about externality which are experienced by unrelated third parties. When the production and consumption of specific goods affects the third parties which don’t relate to the production and consumption, externalities will occur. Most externalities are positive. For example, many companies product goods and bring pollution to environment. However, some externalities are positive, positive externalities can make contribution to this society. For example, some technical research in some companies are not only give this company profits, but also bring convenience to society. So government may solve problems by taxation and subsidies. Taxation can reduce the negative effects of externalities, and subsidies can encourage the positive externalities.