Example Of Market Failures Essay

Market failure is a market condition that means inefficient allocation of resources. The resources are normally goods and services. When the market is not able to produce enough quantity for a given price, then market failure arises and this leads to excess demand relative to quantity produced. Market failure mainly arises in markets where there are public goods and markets dominated by monopolies where a single supplier dominates a market (Powell, 2011). This means that it is only that particular supplier who is able and willing to distribute that good or service. Most monopoly goods are produced by the government because the initial cost of starting the project is too high to be catered by an individual or private entity, for example an electricity company.
Public goods are goods which can be accessed by any person without restriction. Since public goods are non-excludable and non-rivalrious, there arise cases of free rider problem where people can access a public good without paying for it. An example of public good is a public park where everyone has access to it and there is no restriction as to who enters. Market failures lead to positive and negative externalities (Munday, 2000). Positive externalities are not a threat in the market because the marginal social benefit is high compared to marginal social cost. There are spill overs when it comes to positive externality. An example of positive externality is education and innovation. Negative externality is a threat to the market because an action by one person leads to unintended negative effects to another person. The marginal social cost is higher than the marginal social benefit. An example of negative externality is pollution of water which is caused by an industry whose waste is directed to the river.
In the case of Saint Leo, we can say the core values produce a positive externality since they emphasize on provision of education, supporting personal development and equity in the society.

There are various ways that a government can use in order to correct market failures. These include;

Direct regulation which refers to government controlling the amount of a good the people use or producers produce. However, this directive is not supported by economics because it is inefficient in terms of costs.
Charge a tax on certain production or consumption such that an individual can control the amount of tax paid. If certain levels of production or consumption are not reached, then no tax is paid. Another form of tax is the pollution tax where industries which pollute the environment to a certain level are required to pay a pollution tax. This tax is called effluent fees. The higher the level of pollution, the higher the effluent fees. A market incentive is another way used by the government to correct market failure. A market incentive is where individuals who reduce consumption of a certain good are given a certificate of approval. The reduced consumption is meant to enable the person share that particular good with other people.
Education - This is where the government conducts campaigns to the society concerning production or consumption of a certain good and the social benefits associated with it.
Property rights - This is where the government imposes a law which ensures compensation to the affected party. Property rights lead to increased cost of production which triggers low production of the good creating a negative externality.
Governments do not work towards resolving market failures instead they lead to more inefficient allocation of resources (Tanzi, 2011). One correctional measure of market failure may lead to market inefficiency in another area. Most of these corrections are just theoretical because in practice none is followed. If market failure is to be corrected, then the policies of correcting market failure must be followed strictly.

References

Powell, R. (2011). AQA AS economics: Unit 1. Deddington: Philip Allan Updates.
Munday, S. C. R. (2000). Markets and market failure. Oxford: Heinemann.
Tanzi, V. (2011). Government versus markets: The changing economic role of the state. Cambridge, UK: Cambridge University Press.