Market Failure
A situation in which the free-market system fails to satisfy society's wants.
When the Invisible Hand doesn't work.
Private markets do not efficiently bring about the allocation of resources. The government might be called upon to attempt to satisfy society's wants.
The Four Market Failures
- Public Goods
- Externalities (third person side effects)
- Imperfect Competition (monopolies)
- Unequal Distribution of Income
In each of he above situations, the government may step in to attempt to allocate resources efficiently.
Why are monopolies a market failure?
Monopolies destroy the key ingredient of the free market system - competition. To fix this market failure, the government must get involved.
Why would the government regulate a monopoly?
- To keep prices low
- To make monopolies Efficiency
How do they regulate?
Use price controls: Price Ceiling. Taxes don't work - they limit supply and that's the problem.
Where should the government place the price ceiling?
- Socially Optimal Price, P = MC (Allocatively Efficiency)
OR - Fair-Return Price (Break-Even), P = ATC (Normal Profit)
