Remedying Market Failures

Instructor: Brianna Whiting
Unfortunately, the economy does not always function perfectly. This can result in market failures. When this happens, a solution needs to be created to fix the problem. Come along as we learn about some of the remedies for correcting market failures.

Market Failure Explained

Meet Tammy! Tammy has just started an economics course, and her first project is to write a paper about market failures. Tammy is a novice when it comes to economics, and her knowledge of market failures is very limited. To write the paper correctly, she realizes that she will need to do a lot of research. She starts by defining the term. Market failure is a situation when the amount of products demanded is not equal to the number of products supplied. When a market failure occurs, the economy gets hurt because resources are not being used in a favorable way resulting in the wasting of resources.

Causes of Market Failure

So, Tammy now needs to figure out what causes the economy fall out of equilibrium. Below we will look at some of the more common causes.

1. Economies of scale- When the cost to produce goods decreases with an increase in production, you have economies of scale. In basic terms, producing more goods leads to lower costs of production of each good. Economies of scale can lead to monopolies as one company can force all of the other companies out and begin to produce all of the products in that market. They can then decide what they want to charge for their products and consumers do not have a choice but to pay them.

2. Public goods- Public goods are those that do not exclude anyone from using it; one person cannot prevent others from using it, and no one can reject using it. When goods have all of these qualities, no one wants to pay for the good because they do not have to enjoy it. This results in individuals getting the goods for free at the expense of those that have paid for it. For example parks and streets. Individuals might not pay for parks and street, but they still get to enjoy them.

3. Externalities- Sometimes goods that are created have consequences that no one pays for. There are two types of externalities, good and bad. Good externalities benefit society, but the benefits are not considered in the price leading to a higher price and less of the product consumed. Bad externalities do not benefit society, and again the cost is not seen in the price, so the price is low and more products are consumed. An example might be pollution. Pollution is bad for our health and the environment. When goods are produced that create pollution, the cost of those goods does not include the cost of fixing the pollution.

Remedies for Market Failure

Tammy now know what causes a market to fail, but how do we correct it? What remedies are available to correct a failing market? Let's take a look at some solutions now.

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