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Market Failure: Reasons and Consequences

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Market failure occurs where free markets fail to allocate scarce resources efficiently. Market failure can come in many forms, the main four are public goods, Merit goods, Externalities and imperfect competition. In this report, I will investigate the relationship between these four main factors and the free market.

Public goods are goods and services that cannot be provided by the private sector. Public goods can be classified as pure public goods and quasi-public goods. Pure public goods are not at all provided by the private sector – hence there is a market failure due to ‘missing markets’. This is partly due to the ‘free rider’ principle – i.e people are able to access, consume and benefit from public goods without being required to pay for them. Pure public goods have two stands out characteristics, these are;

? Non-rival – consumption of the good by one person does not reduce the amount available for consumption by another person. Eg. Terrestrial television services provided by the BBC.

? Non-excludable – where it is not possible to provide a good or service to one person without it thereby being available for others to enjoy – if you cannot exclude the non-payers, a profit-motivated business may decide not to supply these products e.g defense systems, lighthouse protection.

Quasi-public goods are goods that are not purely public, this means that they are public in nature but do not display fully the characteristics of non-excludability and non-rivalry. An example of this would be roads, they may become rivals at peak time.

Merit goods are goods and services which are deemed to be socially desirable, and which are expected to be under-produced and under-consumed. Examples of merit goods would be education, health care, welfare services and public parks. In contrast to pure public goods, merit goods could be, and indeed are, provided through the market but not necessary in sufficient quantities to maximize social welfare. Merit goods have a tendency to be underprovided by the market because;

? They generate positive externalities

? There is an unequal distribution of income

? Consumers may lack perfect information

? Consumers may be uncertain as to their future needs

An externality is an impact on a person not connected to the initial transaction. An externality arises when a person engages in an activity that influences the well-being of a bystander and yet neither pays nor receives any compensation for that effect. When the effect on the bystander is unfavorable, the externality is called a negative externality. When the effect on the bystander is beneficial, the externality is called a positive externality.

Positive externalities include;

? Education

? Perfume

? Parks

Negative externalities include;

? Pollution

? Anti-social behavior

Imperfect competition is a competitive market situation where there are many sellers, but they are selling heterogeneous (dissimilar) goods as opposed to the perfectly competitive market scenario. As the name suggests, competitive markets that impact in nature.

Impact competition is the real world completion. Today some of the industries and sellers follow it to earn surplus profits. In this market scenario, the seller enjoys the luxury of influencing the price in order to earn more profits. If a seller is selling a nonidentical good in the market, then he can raise the prices and earn profits. High profits attract other sellers to enter the market and sellers, who are incurring losses, can very easily exit the market.

There are four types of imperfect markets;

? monopoly (only one seller)

? Oligopoly (few sellers of goods)

? Monopolistic competition (many sellers with highly differentiated)

? Monopsony (only one buyer of a product)

Universal Credit is a government policy on welfare. Universal Credit was brought in to replace 6 benefits, these were; child tax credit, housing benefit, income support, income-based jobseekers allowance, income-related employment and support allowance and working tax credit. The initial idea was outlined by the Work and Pensions Secretary Iain Duncan Smith at the Conservative Party annual conference in 2010. The aim was for the policy to be brought in fully over four years, two parliaments and to merge the previously mentioned benefits. Universal Credit was brought in to streamline the benefits system and to make claiming benefits easier as you did not have to apply six times you only had to apply once.

Universal Credit was part of the 2012 Welfare Reform Act. Universal Credit works by having one monthly payment. This payment is made up of basic ‘standard allowance’ and extra payments that might apply depending on the circumstances of the claimant. With universal credit, there is a 7-day waiting period where you do not receive any money, you then may have to wait up to seven weeks to get the first payment.

There has been a lot of criticism about universal credit mainly regarding the long waiting period between first applying for it and the first payment. The government claims that this time is necessary for the claim to be assessed. In the period from applying to getting the benefits people who rely on the government to pay their rent have to pay it themselves and this can lead people into serious debt. In figures obtained by the Labour Party, it was revealed that half of all council tenants on universal credit are at least a month in arrears with their rent.

Universal Credit has been regularly criticised by newspapers and opinion shows. This is because of the long wait between application and payment. Research shows that people waiting for the payments have fallen into debt and when the payment does eventually come through they have to spend a proportion of that money to try and get them out of debt.

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