5 Reasons Why Markets 5 Reasons Why Markets FailFail

Chapter 7-2Chapter 7-2

1. Inadequate Competition1. Inadequate Competition

Inefficient Resource AllocationInefficient Resource Allocation inadequate competition usually means a inadequate competition usually means a

firm does not use resources efficientlyfirm does not use resources efficiently Higher Prices & Reduced OutputHigher Prices & Reduced Output

artificial shortages cause high prices artificial shortages cause high prices (monopoly)(monopoly)

Economic & Political PowerEconomic & Political Power firms back certain politicians that will firms back certain politicians that will

support their businesssupport their business

2. Inadequate Information2. Inadequate Information When knowledge that is important to When knowledge that is important to

buyers is hard to find, failure may buyers is hard to find, failure may occuroccur

3. Resource Immobility3. Resource Immobility The 4 factors do not move to The 4 factors do not move to

markets where returns are highestmarkets where returns are highest Ex. Continental and United MergeEx. Continental and United Merge

Some will find other work in the same townSome will find other work in the same town Some people will move to find work Some people will move to find work

(Chicago)(Chicago) Some will not be able to sell their houses Some will not be able to sell their houses

and have to stay for an extended period of and have to stay for an extended period of timetime

Some do not want to leave their hometownSome do not want to leave their hometown

4. 4. ExternalitiesExternalities (unintended side effect)(unintended side effect) Negative ExternalityNegative Externality =harm, cost or =harm, cost or

inconvenience suffered by a 3inconvenience suffered by a 3rdrd party party Ex. Ex. Noise pollution caused by a new Noise pollution caused by a new

wing at the airportwing at the airport Positive ExternalityPositive Externality =benefit received =benefit received

by a 3by a 3rdrd party that had nothing to do party that had nothing to do with the activitywith the activity Ex. Restaurant gets more business Ex. Restaurant gets more business

because of airport expansionbecause of airport expansion

5. Public Goods5. Public Goods Need for goods that are collective used by Need for goods that are collective used by

the publicthe public National defenseNational defense PolicePolice FireFire HighwaysHighways

Difficult to collect $ for everyone’s “fair Difficult to collect $ for everyone’s “fair share”share”

Gov’t must provide Gov’t must provide these things because these things because they cannot be withheld if people can’t they cannot be withheld if people can’t pay for thempay for them