Discuss in detail how the following factors lead to the misallocation of resources in the market (Market Failures). In neoclassical economics, market failure is a situation in which the allocation of goods and services by a free market is not Pareto efficient, often leading to a net loss of economic value
Discuss in detail how the following factors lead to the misallocation of resources in the market (Market Failures)
INTRODUCTION
Market failure is when the forces of supply and demand fail to allocate resources efficiently / when markets fail to allocate goods and services efficiently. 🗸🗸
[Accept any other correct introduction]
[Max 2]
BODY: MAIN PART
1. Missing Markets
- Markets are often incomplete in the sense that they cannot meet the demand for certain goods. 🗸🗸
- Public goods:
- They are not provided by the price mechanism because producers cannot withhold the goods from non-payment and there is often no way of measuring how much a person consumes. 🗸🗸
Public goods have the following features:
Non-rivalry:
- The consumption by one person does not reduce the consumption of another person e.g. a lighthouse. 🗸🗸
Non-excludability:
- Consumption cannot be confined to those who have paid, so there are free riders e.g. radio and TV in South Africa. 🗸🗸
Merit goods
- These are goods/services that are deemed necessary or beneficial to the society, e.g. education, health care etc. 🗸🗸
- These goods are highly desirable for general welfare but not highly rated by the market, therefore provide inadequate output/supply. 🗸🗸
- If people had to pay market prices for them relatively too little would be consumed – the market will fail. 🗸🗸
- The reason for undersupply of merit goods is that the market only takes the private costs and benefits into account and not the social costs and benefits. 🗸🗸
Demerit goods
- These are goods/services that are regarded as bad or harmful for consumption hence we should use less of these e.g. alcohol, cigarettes, etc. 🗸🗸
- Demerit goods lead to a lot of social costs, therefore, the government charges sin tax / excise duties to discourage the consumption of such goods. 🗸🗸
- While the market is willing to supply demerit goods, it tends to oversupply demerit goods. 🗸🗸
- Some consumers may be unaware of the true cost of consuming them. 🗸🗸
2 Lack of information
- Technical and allocative efficiency require that both producers and consumers have complete and accurate information about the costs and benefits of the goods and services produced and consumed in the market. Producers and consumers make production and consumption decisions based on the information they have. 🗸🗸
- When information is incomplete or inaccurate, it leads to wrong decisions about what to produce, how to produce and for whom to produce, and a waste of resources occurs. 🗸🗸
- Producers might not know all the different technologies and production techniques that are available and the different resources that can best be used to produce goods/services more efficiently. 🗸🗸
- Consumers might not know that the price of a product is lower from some other suppliers or about the harmful effects of a product since they might just base their decisions to consume on the information from a misleading suppliers. 🗸🗸
3. Immobility of factors of production
- Markets do not respond to changes in consumer demand if resources cannot be easily reallocated or due to a lack of information🗸🗸
- Labour takes time to move to into new occupations and geographically to meet the changes in consumer demand. 🗸🗸
- Physical capital e.g. equipment, buildings, land and raw materials can only move from one place to another at a high cost, but cannot be moved to fit a change in demand. 🗸🗸
- Technological applications change production methods e.g. use of robots rather than physical labour. It takes time for most industries to adapt. 🗸🗸
- With greater technological change there is an increasing need for workers to become flexible, to update skills, change employment, occupations and work patterns. 🗸🗸
[Max 26]
ADDITIONAL PART
- Motivate why government has implemented a national minimum wage in the labour market. 🗸🗸
- Pressure was put on the South African government to introduce labour laws which require employers to pay minimum wages. 🗸🗸
- The application of minimum wage laws is needed to improve a redistribution of income. 🗸🗸
The main objectives were:
- To redress inequality (Gap between wealthy and poor) 🗸🗸
- To improve the standard of living. 🗸🗸
- Government tried to protect domestic workers and farm workers — thus preventing exploitation. 🗸🗸
[Max 10]
[Accept any other correct relevant response]
CONCLUSION
Governments intervene in the market when market forces cannot achieve the desired output.
[Max 2]
[Accept any other relevant conclusion]