Thursday, 13 April 2017

Market Failure

Market Failure

A Market failure is the economic situation defined by an inefficient distribution of goods and services in the free market. Furthermore, the individual incentives for rational behavior do not lead to rational outcomes for the group.
The Basic of market failure simply synonymous with market failure in achieving the efficiency of resource allocation in the community. However, this understanding is not absolute, hanging with the purpose of how a system that applied. As Japan means market failure as a condition where market mechanisms are not capable of achieving the purpose set out the Government, so that the market became inadequate in the provision of basic infrastructure, the fulfillment of basic needs, and delivery of essential services for the community.


The traditional theory of market failure illustrates market failure as a condition in which the damage or loss occurred or the efficiency of the allocation. The result of the market not optimal or less efficient causing externalizes. The existence of three types of inefficient markets, namely:

  • (1) Product mix inefficiency, whereby the market producing very much one good and a little bit of stuff that other,
  • (2) Exchange inefficiency, whereby some of the goods produced in the market is not able to achieve the desires of the individual, and
  • (3) Production inefficiency, as the production of an item limit of possibilities away from the production.

Resource Allocation Inefficiencies As A Form Of Market Failure

The picture above shows one of the resource allocation inefficiencies due to the behavior of market monopoly in monopolies. The existence of monopoly distorts the allocation of resources. The monopoly of deliberately limiting their production in order to maximize profits. From the graph, it can be seen that a monopoly produces much smaller stuff like that happens to a perfect competition market-namely of Q **. Difference (Q * Q *-*) reflect an emergence occurs or dead weight loss, namely the loss of consumer surplus parts.

The difference between price and marginal cost show that at the level of output that maximize profits, consumers want to pay for more expensive for an extra unit of at the cost to produce the output .

Currently, arguably no one any country that its economic activities are free from government interference. The trend is also going on in the country that the economy most liberal or capitalist though. When viewed the history behind this is a cycle that keeps spinning, in the period of Mercantilism where the role of Government is quite dominant in the economy experienced a failure that is marked by the birth of the classic theory of Adam Smith. Later replaced by the role of the private sector that is so dominant in the economy of a country.

However, the role of the private sector also encountered a failure known as the failure of the market (market failure). It is characterized by the presence of the great depression due to market mechanisms that are not running as it should, that ultimately the Government is expected to play a role in the economy. In other words the role of Government remains necessary, not eliminated.

The role of the Government is so large in the economy cannot be released from the failure of the market (market failure). Market failure is what initially became the background where the need for government intervention. Market mechanisms through the invisible hand was judged incapable of efficiently and effectively in carrying out its functions is a traditional market failures. But the failure of the market is just one reason why the Government should intervene in the economy in order for the welfare of society can be achieved optimally. Market failure is a requirement that needs to be (a necessary condition) for government intervention.

A market economy that is controlled by a Government that is democratically elected, there are only two reasons for the Government to enter into the activities of the community, namely: social equity and market failure. Based on the reasons that, in the outline of the role of Government with public policies is the correct market failure to improve production efficiency and the allocation of resources and goods, as well as relocating goods opportunists and to achieve the values of distributional and other values.

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