MANAGERIAL ECONOMICS AND
PRINCIPLES OF MANAGEMENT
MARKET FAILURE
C DHINESH BABU
EE22B1006
Market Failure:
Definition and
Causes
Market failure occurs when the free market fails to allocate resources
efficiently, resulting in a suboptimal outcome for society. This can arise
from various factors, such as externalities, public goods, information
asymmetry, and market power.
Types of Market Failure
1 Externalities 2 Public Goods
Externalities occur when the Public goods are non-
actions of one party affect the excludable and non-rivalrous,
welfare of others, without meaning that it is difficult to
compensation or payment. prevent individuals from
consuming them, and one
person's consumption does not
diminish another's.
3 Information Asymmetry 4 Market Power
Information asymmetry occurs Market power arises when a
when one party in a transaction single firm or a small group of
has more information than the firms has significant control
other, leading to potential over the market, leading to
market inefficiencies. potential price manipulation and
reduced consumer welfare.
Externalities and Public Goods
Externalities Public Goods
Externalities can be positive or negative. For example, a Public goods are often under-provided by the market
factory's air pollution is a negative externality, while a because individuals can benefit from them without
beekeeper's honey production is a positive externality. contributing to their production, leading to the "free-rider
problem".
Information Asymmetry and
Moral Hazard
Information Asymmetry
Information asymmetry can lead to adverse selection,
where high-risk individuals are more likely to participate in a
market, driving up costs for everyone.
Moral Hazard
Moral hazard arises when one party, after entering into a
contract, has an incentive to act in a way that is detrimental
to the other party.
Natural Monopolies and
Antitrust Policy
Natural Monopoly A situation where it is more
efficient for a single firm to
produce a good or service due
to high fixed costs or economies
of scale.
Antitrust Policy Government policies aimed at
preventing monopolies and
promoting competition in the
marketplace.
Government Intervention:
Rationale and Objectives
Correcting Market Protecting Consumers
Failures
Government intervention can
Government intervention aims protect consumers from unfair
to address market failures and practices and ensure a fair and
ensure a more efficient competitive market.
allocation of resources.
Promoting Social Welfare
Government intervention can promote social welfare by addressing
issues like poverty, inequality, and environmental degradation.
Policy Instruments: Taxes,
Subsidies, and Regulations
1 Taxes
Taxes can be used to discourage activities with negative
externalities, such as pollution.
2 Subsidies
Subsidies can be used to encourage activities with positive
externalities, such as renewable energy production.
3 Regulations
Regulations can set standards for product quality, safety, and
environmental protection.
Evaluating the Effectiveness of
Government Intervention
Costs Benefits
Government intervention can be costly to Government intervention can lead to
implement and administer. improved efficiency, reduced inequality,
and a better environment.
Efficiency Effectiveness
Government intervention can sometimes The effectiveness of government
lead to unintended consequences or intervention depends on the specific
create new inefficiencies. policy instrument used and the context in
which it is applied.
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