MARKET FAILURE

GROUP 9
BAGATSING, JOSHUA
PEÑALOSA, GIANNA
ROMULO, DREA
TANGTATCO, EUNICE
MARKET FAILURE
 WHAT IS MARKET FAILURE?
Occurs when resources
are located inefficiently
It is when markets fail to
reach optimal outcome
Results in waste or lost
value
System is not Pareto
efficient.

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Pareto Efficiency?
An improvement in one area which would cause
corresponding harm somewhere else.
If the market is Pareto efficient, it means that everything is
in balance.
 Operating at optimum level

EXAMPLE OF A SYSTEM THAT IS NOT PARETO

EFFICIENT:
 Fare hike
 When transportation groups ask for a fare hike, these transport
groups will benefit but commuters will be burdened by the
increase in fare.

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SOURCES OF MARKET FAILURE

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IMPERFECT MARKET
STRUCTURE
An imperfect market is a situation where
individual firms have some measure of control
or discretion over the price of the commodity in
an industry
 
 This imperfect competition does not necessarily
mean that a firm can arbitrarily put any price on
its commodity
 Imperfect Markets exercise Market Power
o Market Power – the ability to raise price without
losing all of the quantity demanded for their product

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Imperfect Competition
 It is a market situation where single/individual firms
have a measure of control over the price of the
commodity and competition in an industry.
o A firm that can affect the market price of its output can be
classified as an imperfect competitor.
 An imperfect competitor does not have absolute power over
price and may or may not have product differentiation/variation
 The industries that rise the inefficient allocation of
resources
 It normally arises when an industry's output is
supplied only by one, or a relatively small number of
firms.

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Monopoly
 An industry composed of only one firm that
produces a product for which there are no close
substitutes and in which significant barriers exist
to prevent new firms from entering the industry
o Market situation where a single seller exists and has
complete control over an industry
 Control over vital resources
 Product techniques and processes
 Licenses
 Copyrights
 Limit Pricing
 Size of Market

Ex. Meralco is sole distributor of electric power in Metro

Manila (Electric Utility)
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Oligopoly
 An industry made up of small number of firms,
each with a degree of price setting power
 Firms operating in an oligopolistic market
situation may either collude (ex. CARTEL) or act
independently

Ex. Cement and automobile industries

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Monopolistically Competitive Industries
(Monopolistic Competition)
 An industry made up of a large number of firms
that acquire price-setting power by
differentiating their products or by establishing a
brand name
o It occurs when there are many sellers producing
differentiated products
o Firms have slight control over the price of the commodity
they advertise

Ex. Flea Markets and small players in the food

or clothing industry

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Others
 Monopsony - When there is only one buyer of
a good
 Oligopsony - When there are few buyers of a
good
 Information Asymmetry - When one competitor
has the advantage of more or better
information

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The Truth behind Imperfect Markets
 Monopoly
o Being a monopolist does not ensure the firm instant
profit
o It is not true that the firm can impose any price it
wants because maximum price is dictated by
market demand
o A firm that attempts to monopolize the industry or
that conspires with other firms to reduce
competition, risks serious penalties
 Ex. Antitrust Case by the Justice Department against
Microsoft in the 1990’s
 Microsoft was accused of trying to monopolize the
browser market and other anti competitive practices

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PUBLIC GOODS
Public Goods or Social Goods
- goods and services that bestow common
benefits on members of society
 Private Goods
- goods and services produced by firms for
sale to individual households

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PUBLIC GOODS
• Produced using land, labor, and
capital just like any other good

• Consumed by everyone not just

by those who pay for them

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 What happens if public goods
were left to private profit-
seeking producers?
• Private provision of public goods
fails
• A completely laissez-faire market
system will not produce
everything that all members of a
society might want
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What should they do?
• Citizens must group together to
ensure that desired public
goods are produced
- this can be accomplished
through government spending
financed by taxes

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EXTERNALITIES
It is a cost or benefit bestowed on an individual or
a group that is outside the transaction.
Something that affects a third party
They are only a problem if decision makers do not
take them into account
NOT ALL EXTERNALITIES ARE NEGATIVE.
There are also positive externalities

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Negative Externalities
A “SOCIAL COST”.
Most of the time related to environmental
consequences of production and use
Occurs when an individual or firm making a decision
does not have to pay the full cost of the decision
cost to society > cost consumer is paying for it
Examples of which are air or water pollution, global
warming, noise and congestion.

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MARKET FAILURE
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How can this be solved?
Tax the producer
Adds to the producer’s marginal cost

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Positive Externalities
External benefit
Benefit of the firm or individual < benefit of
society.
Less is produced and consumed than the socially
optimal level
Examples:
Knowledge spillover of ideas
Keeping the backyard well maintained
Collection of honey from bees
Immunization/Vaccination

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MARKET FAILURE
© FundamentalFinance.com
How can this be solved?
Give a subsidy to consumers.
 By giving consumers a subsidy, it will increase the
benefit that they will receive when they consume a good.

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 The government can INTERVENE to
address this issue BUT government
intervention can also CONTRIBUTE in
market failure, therefore making the problem
worse.

Knowing when and how to intervene is a

DIFFICULT DECISION.

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IMPERFECT INFORMATION
Lack of knowledge about the product
Leads to an inefficient market
Difficult to judge benefits and costs of purchase of
products and services
Example are life insurances, services that needs
expertise
Examples of information failure
Uncertainty about costs and benefits
Complex information
Inaccurate or misleading information

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IMPERFECT INFORMATION
Can be corrected by:
Truth-in advertising regulations
Government provides information to the citizens

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MARKET MECHANISM
In reality, markets aren’t perfect
Some ask help from government to correct market
failure
 Government might not be able to help, instead it could make
things worse
Outcome of free market is ultimately unfair

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Evaluating the Market Mechanism
 A Perfectly Competitive model reflects the way
markets really operate because of its clear
advantages
o Markets such that no participants are large enough to have
the market power to set the price of a homogeneous product
 It includes non-competitive markets, imperfect
markets, public goods and externalities
 Firms can make profits only when a demand for their
products exist
 The profit motive should provide competitive firms
with incentives
o Minimize cost
o Produce their product using the most efficient technologies

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 References
The Principles of Economics: Chapter 12
- Market Failure
en.wikipedia.org/wiki/Imperfect_competition
www.investorwords.com/2380/imperfect_market.html
en.wikipedia.org/wiki/Oligopoly
http://en.wikipedia.org/wiki/Monopolistic_competition

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 References
www.investopedia.com/terms/i/imperfectmarket.asp
en.wikipedia.org/wiki/Monopoly
www.wisegeek.com/what-is-imperfect-competition.htm
www.tutor2u.net/economics/content/topics/competition/comp
etition.htm
www.answers.com/topic/imperfect-competition
www.investopedia.com/terms/p/perfectcompetition.asp
economics.fundamentalfinance.com/

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