Market failure
👉 Did you know that these are all examples of market failure? It happens all around us, and this is because sometimes the market doesn’t allocate resources in the most efficient way.
👉 Market failure can lead to pollution, public goods problems, and even unfair monopolies. Let's explore why this happens and what we can do about it!
What are the types of market failure?
Let’s explore these types in more details and why they lead to market failure👇
📉 The Over-Provision/overconsumption of Demerit Goods
Demerit goods are things like junk food, alcohol, and cigarettes that can harm people's health.When there is an over-provision of a good, it means that these goods are provided/produced more than is necessary.
Companies often produce too much of these because they can make a lot of money, even though they are bad for society.
👉 This is a market failure because the market is overproducing goods that have harmful effects, rather than allocating resources to more beneficial products.
Example: Despite public health campaigns, cigarette companies sell millions of packs each year.
- “The annual cost to NHSScotland of treating smoking related diseases is estimated to exceed £300m and may be higher than £500m each year”
The market fails here because it prioritises profits over public health, leading to increased healthcare costs and reduced productivity.
🚫 The Under-Provision/Non-Provision of Public Goods
Public goods like clean air, parks, and street lighting benefit everyone, but private companies cannot charge users directly for them, leading to under-provision or non-provision.👉 This is a market failure because the free market doesn’t supply enough of these essential services, resulting in societal inefficiencies.
Example: The maintenance of public parks in Scotland, like Holyrood Park in Edinburgh, is funded by the government because private companies wouldn’t provide them for free, even though everyone benefits from having green spaces.
🏥 The Under-Provision of Merit Goods
Merit goods like education and healthcare are beneficial to individuals and society, but if left to the free market, they may be under-provided because not everyone can afford them.👉 This market failure occurs because society benefits from widespread access to these services, which the market alone does not ensure.
Example: In Scotland, the government provides free education and free prescriptions. If these were left to the market, many people might not be able to afford school or necessary medicines, leading to worse health and education outcomes for society.
🏢 Monopoly Power
When one firm dominates a market, it can lead to reduced choices for consumers, higher prices, and poorer quality products.👉 This is a market failure because the monopolistic firm has too much control, leading to inefficiencies and a lack of competition.
Example: The UK energy market has faced criticism for being dominated by a few large companies, leading to higher energy bills and less innovation.Ofgem, the UK energy regulator, has had to intervene with a price cap to ensure fair competition. www.ofgem.gov.uk
🌫️ Negative Externalities
Negative externalities are costs that businesses do not account for in their production processes, which end up affecting other people or the environment.👉 This is a market failure because the true costs of production are not reflected in the price of the goods, leading to overproduction and societal harm.
Example: Industrial pollution in the River Clyde has been a historical issue, impacting local wildlife and communities. Efforts to clean up the river have been ongoing, but the cost of pollution cleanup often falls on the government and taxpayers.
🌿 Positive Externalities
Positive externalities are benefits to society that occur when a good or service is produced, but the market may not provide enough of them.👉 This market failure happens because the market undervalues these goods, resulting in underproduction.
Example: Did you know that if you are under 22, your option to travel by bus for free in Scotland is an example of government intervention to address a positive externality?When the government provides free bus travel for young people, it encourages more people to use public transportation. This reduces traffic congestion, lowers pollution, and promotes greater mobility for young people to access education, work, and social activities. Without government support, fewer young people might afford bus fares, leading to more cars on the road and increased pollution.
⚖️ Wealth/Income Inequality
Wealth and income inequality occur when resources are not shared equally, leading to some people having much more than others.👉 This is a market failure because it leads to an inefficient allocation of resources, where wealthier people have access to more resources than others, reducing overall societal welfare.
Example: In Great Britain, there is significant wealth disparity, with the richest 10% of households owning 45% of total wealth compared to the bottom 50% of households owning only 9% of total wealth!
- This can lead to social problems and inefficient use of resources.
🧩 Lack of Information
Sometimes, producers know more about a product than consumers, leading to people making poor choices.👉 This is a market failure because unequal information leads to inefficient market outcomes where consumers cannot make fully informed decisions.
Example: In the UK, the used car market often has issues with "lemon" cars (faulty used cars). Buyers may not know about hidden problems, leading to costly repairs.“It estimates that 750,000 consumers a year face unresolved problems with a used car purchase.” read more here 👇