MARKET FAILURE
Market efficiency is achieved by allocated resources so that society maximises net
benefits, as measured by the total surplus. As resources are scarce, they need to be used
in the best possible way, which society values. Price gives consumers and producers
incentives about decision making on consumption and production.
Market failure occurs when resources are not allocated efficiently; economic surplus
was not maximised. Government intervention occurs in failed markets to improve
market outcomes. The common types of market failure include:
• Market (monopoly) power
• Externalities
• Public goods
• Common property resources
Market Power
Imperfect market exists when:
• Relatively small number of firms
• Firms have market power
• Firms use product differentiation
• Barriers to entry are used to restrict competition
Monopolies and oligopolies are examples of imperfect markets. A monopoly is a market
with when just one firm. An oligopoly is a market with a few large dominant firms. In
imperfect markets, firms are said to have market power or ‘monopoly’ power, allowing
them to set prices, usually higher as there is less competition.
Barriers to entry is anything that restricts or blocks the entry of new firms into an
industry or market. Examples include:
Existing firms may already acquire hard to get raw materials, not readily
available to new competitors- mining company controls sole mine for a good
Patents may be required for new competitors, causing existing firms to control
the market- pharmaceutical patent to produce a new drug
Government licence granting a legal monopoly- Australia post
Technological advantage- Microsoft- history and wide use in computer operating
systems
Extensive product differentiation, large advertising budget controlling retail
outlets
Large set up costs
Collusive behaviour- price fixing, etc
In imperfect markets, firms can use their market power to ‘exploit’ the market. Market
power allows firms affect the market price by varying its output. Monopoly and
oligopoly firms have substantial market power as they operate in markets with little to
no effective competition. Firms with market power aim to increase their profits. Their
interests rarely coincide with the society’s interests, therefore socially optimal level of
output is poor. Markets will result in higher prices and reduced output, decreasing
economic welfare.
Anti-Competitive Behaviour
Market efficiency is achieved by allocated resources so that society maximises net
benefits, as measured by the total surplus. As resources are scarce, they need to be used
in the best possible way, which society values. Price gives consumers and producers
incentives about decision making on consumption and production.
Market failure occurs when resources are not allocated efficiently; economic surplus
was not maximised. Government intervention occurs in failed markets to improve
market outcomes. The common types of market failure include:
• Market (monopoly) power
• Externalities
• Public goods
• Common property resources
Market Power
Imperfect market exists when:
• Relatively small number of firms
• Firms have market power
• Firms use product differentiation
• Barriers to entry are used to restrict competition
Monopolies and oligopolies are examples of imperfect markets. A monopoly is a market
with when just one firm. An oligopoly is a market with a few large dominant firms. In
imperfect markets, firms are said to have market power or ‘monopoly’ power, allowing
them to set prices, usually higher as there is less competition.
Barriers to entry is anything that restricts or blocks the entry of new firms into an
industry or market. Examples include:
Existing firms may already acquire hard to get raw materials, not readily
available to new competitors- mining company controls sole mine for a good
Patents may be required for new competitors, causing existing firms to control
the market- pharmaceutical patent to produce a new drug
Government licence granting a legal monopoly- Australia post
Technological advantage- Microsoft- history and wide use in computer operating
systems
Extensive product differentiation, large advertising budget controlling retail
outlets
Large set up costs
Collusive behaviour- price fixing, etc
In imperfect markets, firms can use their market power to ‘exploit’ the market. Market
power allows firms affect the market price by varying its output. Monopoly and
oligopoly firms have substantial market power as they operate in markets with little to
no effective competition. Firms with market power aim to increase their profits. Their
interests rarely coincide with the society’s interests, therefore socially optimal level of
output is poor. Markets will result in higher prices and reduced output, decreasing
economic welfare.
Anti-Competitive Behaviour
