Macroeconomy Unit 8: Government Reaction to Market Failures
Market Failures
Not Enough Competition
Lack of competition causes too little output because the firms don't have to compete with
one another to produce a good which might be a more efficient use of resources.
Lack of competition between buyers causes too little output because the few buyers can
challenge the firms on the prices and they have to comply because there is a limited
number of buyers.
The government can make more firms enter a market, increasing the trade producing
more output.
The introduction of more firms due to government intervention shifts supply to the right.
The Existence of Common Property Resources
Common property resources cause too much production.
The government can make property private by assigning property rights to conserve
resources which reduces output.
Assigning property shifts supply left due to government intervention.
The existence of External Benefits or Costs
Markets with external benefits will produce too little.
The government can use regulations or subsidies to shift the supply rightward
increasing production.
Markets with external costs will produce too much.
The government can use regulations or taxes to shift the supply curve leftward
decreasing production.
Information Failures
When one market is unaware of an information discrepancy and don't opt out this creates
too much output due to information asymmetry.
When one market is aware of information discrepancy and chooses to opt out this creates
too little output due to information asymmetry.
The government can provide information to sellers or pass legislation to disclose
information to produce more output, shifting the supply curve left.
The Existence of the Free Rider Dilemma
Markets with the Free-Rider Dilemma produce too little output because they expect the
other side to pay for it and the other side expects them to pay for it.
The government can collect taxes and use that money to produce public goods producing
more output and shifting the supply to the right.
