The Four Forms Of Market Failure

Allocative efficiency requires business to supply the optimal amounts of all goods and services demanded by society, and they are rationed to individuals who place the highest value on consuming them. Well-functioning competitive markets deliver the best possible price and quantity that achieves social economic efficiency (Thomas & Maurice, 2013). Market failure occurs when a market fails to achieve social economic efficiency and fails to maximize social surplus (Thomas & Maurice, 2013). There are six forms of market failure that undermine economic efficiency: monopoly power, natural monopoly, negative and positive externalities, common property resources, public goods, and information problems (Thomas & Maurice, 2013). These instances provide …show more content…
Monopoly power can occur through actual or attempted monopolization, price-fixing cartels, and mergers among horizontal competitors. A natural monopoly, such as public utilities, is when a single firm can produce the total consumer demand for a product or service at a lower long-run total cost than if two or more firms produce the total industry output (Thomas & Maurice, 2013). In these instances, the government allows a natural monopoly to operate, but is subject to government regulation to ensure an efficient outcome that maximizes social surplus (Thomas & Maurice, 2013). Antitrust policies are enforced in the United States by the Department of Justice and the Federal Trade Commission; they seek to prohibit business practices and actions that reduce or restrain competition (Thomas & Maurice, 2013). Antitrust agencies require firms planning large mergers to notify them of their intentions prior to merging. Antitrust officials have 90 days to determine whether they will challenge the merger or approve it. Second-best pricing is setting the price as close as possible to marginal cost, yet high enough to insure zero economic profit (Thomas & Maurice, 2013).Two-part pricing satisfies social efficiency conditions and maximizes social surplus; it charges a fixed access charge plus a usage fee based on the number of units purchased (Thomas & Maurice, 2013). This method is commonly …show more content…
There are two kinds of market failure caused by lack of excludability: common property resources and public goods (Thomas & Maurice, 2013). In the absence of government intervention, common property resources are overexploited and public goods are under-produced (Thomas & Maurice, 2013). Common property resources are resources that have no clearly defined property rights to exclude anyone from accessing the resources (Thomas & Maurice, 2013). These resources will be overused and under-produced, diminishing their contribution to social surplus (Thomas & Maurice, 2013). An example is hunting and the ‘rule of capture’ that applies to many non-excludable resources. Pure public goods are both non excludable cannot be depleted, like national security for all citizens. A good is nondepletable if one person’s consumption of the good does not reduce the quantity available to other members in society. (Thomas & Maurice, 2013). When suppliers of public goods are unable to prevent nonpayers from consuming their output, they have a free-rider problem. If it is severe, it may not allow the supplier to collect enough revenue to cover costs, which will deter the firm from producing any of the affected goods (market failure). Improving and enforcing property rights is the best way to save common property resources from inefficient exploitation. Deadweight loss can be avoided only if the price of the