The Concept Of Market Failure

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Market failure is when organizations fail to deliver goods and resources efficiently within a free market. This can all be due to different reasons like negative externalities, positive externalities, merit goods, public goods etc. Organizations and producers can fail to consider the effects of third parties, such as car drivers which can fail to consider the congestion they can produce for others and smokers who don’t consider the pollution and second-hand smoke within the air.

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Third parties can be different organizations or individuals who indirectly can be benefitting or suffering due to actions of others who pursue their own self-interest. Positive externalities can occur from third-parties spilling benefits from outside the market. These benefits can be in the form of lower costs, increased revenue for other parties or increased satisfaction. An example of this could be the decline of libraries. Libraries have been plunging these past decades due to the rise of e-books and technology available. This has had an external benefit as it allows the public to have free access to different knowledge and advice 24/7 and decreased carbon footprint.

Public goods can also be an example of market failure. This is because they are not usually provided by a private sector business otherwise they would not be able to supply without making any profit. The government would first have to decide if the commodities would be beneficial to society before they decide to make them available. An example of this could be vaccinations, crime control for the local community or even things like online learning freely available. If these goods were left to the market, there would most likely not be enough of them or a desirable amount.

Merit goods are also due to market failure. These are goods or services the Government assume will be under-used and therefore the government will make them free. They are society values every individual should have, regardless if they are able to pay. Examples of merit goods can be, Health programs, education, free school meals, public libraries etc. The Government have made themselves responsible to pay for these organizations . These are needed to maintain a reasonable standard of living but they can be very expensive to provide.

Society need these provisions of services as most individuals would not be able to pay for them their selves and depending on every individual’s situation, some will need more amount of assistance needed than others. The needs and wants for society’s health and welfare requires the government to intervene.

Imperfect competition is when the competitive market has many sellers of similar goods and services but each seller/organization has differentiated their products from every other seller. This can consist of 3 different markets. Monopolies, monopolistic and oligopolies. For example, if a Monopoly happens within two major firms, like Coca-Cola and Pepsi, if one takes over another, they can raise their prices extortionately as there won’t be the competition there for consumers to go elsewhere to (Pepsi and Coca Cola can also be referred to as a duopoly as they are two major firms). The benefit cap came into place around November 2016, where it capped the total amount of benefits most people from the age of 16-64 can receive. This meant that certain households could no longer receive more amounts of money in benefits than an average wage for most working families.

This policy was put in place to try and motivate those who are just living off benefits and persuade them to work and earn more money. Before the cap was introduced, a lot of individuals on benefits felt the need that they didn’t have to work in order to receive money as it was just given to them by the government. The cap stops households which don’t work across the UK from receiving more than £20,000 a year or £23,000 if you live in greater London. This meant that over 76,000 households benefits were capped across the UK. However, a small minority of 7% which were striked by the cap were single parents and 55% of this group also had children under 5. In June 2017, it was then declared within the high court that the benefit cap unlawfully discriminated against single parents with young children.

The benefit cap is an example of market failure as it shows a clear loss of economic welfare. The benefit cap was implemented by the Government to try and get better control of spending within and area that is hard to control.1 It was also implemented to try and limit the amount the government spend on certain benefits like housing benefits and tax credits.

I believe that the benefit cap has been a failure. As 71% of those affected by the benefit cap were single parents who are unable to actually work therefore are at an extreme disadvantage and will now have to live off less money annually than they had before. The evidence shown above entails that the cap is allowing individuals on benefits to further plunge into poverty.

A Source2 within Salford City Centre has also claimed to say that the benefit cap is “effectively a sanction” which results in households having a sudden loss in income and having to either choose to pay between food and utilities or paying their rent.

03 December 2019

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