Market failure occurs when resources are not efficiently allocated among individuals due to externalities. Inequality, limited resources, and government intervention can induce market failure, leading to lower production and higher prices.
Market failure occurs when a nation’s economy is unable to efficiently allocate resources among individuals. It is a pervasive failure that usually results from externalities. Signs of market failure include inequality, few raw materials that allow the economy to build and trade goods, and government intervention that impedes trade and resource use. This type of failure can occur when one or more of these items are present. Several different factors out of these can induce the problem, although these are among the most common ones.
Inequality occurs when one group or class of citizens consistently has more income or resources than another. This classic scenario comes from the feudal system of past history. The lords had lands, castles and resources that extended far beyond the resources of the serfs, who were made to work for the lords. This was a market failure because every individual in the economy failed to succeed. The limitations placed on serfs – who were often unable to maintain the goods produced by their hands – made it difficult for them to rise above their humble services.
Most countries have fixed borders, which limits their ability to pool resources. Market failure occurs when a nation’s borders are so small that there are few resources to produce goods domestically. Therefore, the nation must find trading partners willing to provide the necessary resources or finished products for economic progress. Trade, however, is a two-way street. The nation must be willing to give up some of its assets – however limited – to induce economic advancement and avoid market failure.
Government intervention is usually a common issue or issue that creates a market failure. Pricing controls and regulations are among the top two items that ultimately create market failure. A price control sets a minimum or maximum price that individuals can charge others for goods. The minimum wage is a common price control; companies are given mandates on how much compensation they must pay employees. If the minimum wage is higher than the market, however, goods will be priced higher, creating a potential market failure when consumers cannot afford those goods.
Government regulation occurs when a nation’s political class tries to control how companies operate. Even when nations have abundant economic resources, too much regulation can restrict resource use. This leads to lower production and higher prices as the government tries to control supply and demand. Regulations also increase costs because the company must change its operations to satisfy the government, which can set rules and requirements without economic reasoning. Excessive government control in command economies completely destroys the market, resulting in the final type of failure.
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